Political risks make French stocks Europe’s top target for short sellers
Political instability and France’s budget deficit are prompting funds to bet against the CAC 40
France remains equity investors’ least preferred market in Europe / Photo: Pierre Laborde / Shutterstock.com
Political risk in France has become so elevated that its stock market is now the biggest target for bearish bets across Europe and the U.S. for some investors, Bloomberg reports, citing Barclays strategists.
Funds that use algorithms to make investment decisions, as well as those that are actively managed, are increasingly shunning French stocks, according to the strategists. The Paris stock exchange’s benchmark CAC 40 is on course for its biggest annual underperformance versus the broader Stoxx Europe 600 index since 2010, trailing it for a third consecutive year.
Details
The latest reduction in exposure to French stocks was driven by trend-following funds known as commodity trading advisors (CTAs), according to Barclays. These funds take long or short positions in stock index futures based on market signals.
“CTAs have rebuilt US equity longs while aggressively de-risking Europe, particularly on French political risk, leaving the CAC as the largest short,” Barclays analysts Rex Feng and Anshul Gupta wrote in a note to clients. These funds have a net position close to zero in European equities overall, while holding the largest possible short positions in the French index, they added.
Context
Political instability has dogged the French stock market since June 2024, when President Emmanuel Macron called a snap parliamentary election. The country has had four prime ministers since then, while debt and budget deficits have continued to rise, pushing refinancing costs higher. The latest protests against the rising cost of living escalated into widespread rioting. As risks mounted, the yield spread between 10-year French government bonds and their German peers, a key gauge of French sovereign risk, widened beyond 150 basis points.
Though CAC 40 companies generate only about 16% of their revenue in France, their stocks remain hostage to negative sentiment around the country, Bloomberg notes. Weak consumer stocks have also weighed on the market. The sector accounts for 23% of the index and includes luxury groups LVMH and Hermès International.
Fund managers who do not use algorithms are also increasingly steering clear of French stocks. France remains Europe’s least preferred stock market, according to a BofA survey published last week. A record net 56% of respondents plan to hold a smaller allocation to French equities than their benchmark over the next 12 months.
