French Stocks Slide as Traders Weigh Risks From Gridlock

(Bloomberg) -- French stocks fell as investors assessed risks from political gridlock following legislative elections that produced a divided parliament with no clear majority.

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The CAC 40 ended the session 0.6% lower, reversing course after climbing as much as 0.9%. The French equity benchmark remains down 4.5% since the snap election was announced on June 9, having clawed back less than half of its losses.

The Stoxx Europe 600 was little changed on Monday, as gains across insurance and travel sectors were curbed by weakness among commodity stocks. French media stocks like private sector TV network Television Francaise 1 SA and Metropole Television SA rose as the election result means the far-right National Rally is in no position to follow through with plans to privatize France’s state TV and radio groups.

“The result was a big shock. I don’t really believe that the market has fully understood what the results mean,” Azad Zangana, senior European Economist at Schroders, said by phone. “It’s still a very uncertain period going forward.”

The New Popular Front alliance, which includes the far-left France Unbowed, won the biggest number of seats in Sunday’s final round of voting, but fell short of the 289 required for a parliamentary majority.

Rajeev De Mello, chief investment officer at Gama Asset Management, said he was remaining cautious about the election outcome for now. “The program that the NFP campaigned on would be quite a fiscal burden for France. Investors will wait for the outcome of the negotiations between the parties before re-investing in French assets.”

Bloomberg Intelligence strategists Laurent Douillet and Kaidi Meng said the bloc’s fiscal expansion program is the most “anti-market” among the parties and could weigh on all companies with large labor exposures in France.

French banking stocks including BNP Paribas SA and Societe Generale SA are in focus because of how political uncertainty will affect lenders as major holders of sovereign debt. Plus, the left has also talked about raising banks’ mandatory capital buffers and transaction taxes, along with floating plans for higher taxes on wealth, dividends and share buybacks. Shares in both fell on Monday.

“If you’re buying CAC 40 stocks, to some extent you’re buying France’s economic growth,” said Kevin Thozet, investment committee member at Carmignac Gestion SA in Paris. “It’s not looking bright in this current scenario notably for banks, which could suffer further if the French sovereign debt remains under pressure.”

The CAC 40 has rebounded from the worst of its recent lows thanks to bets that Marine Le Pen’s far-right National Rally would fail to win an absolute majority.

“We have bought already some French stocks after the first election dip,” said Ulrich Urbahn, head of multi-asset strategy and research at Berenberg. “The downside for stocks is muted.” Potential gains may also be curbed, however, given the continued uncertainty and the partial recovery in equities seen before Sunday’s second round of voting, he said.

Takeover talk fueled the biggest moves among individual stocks in Europe, including insurer Hiscox Ltd, the Stoxx 600’s top gainer. Grifols SA also jumped after the Spanish blood-plasma company received a buyout approach. Delivery Hero SE dropped after saying it may be hit with a fine exceeding €400 million ($434 million) by the European Commission over alleged anti-competitive behavior.

For more on equity markets:

  • French Vote Brings ‘Least Bad’ Scenario for Market: Taking Stock

  • M&A Watch Europe: Carlsberg, Britvic, Grifols, Volue, Veolia

  • US Stock Futures Fall

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--With assistance from John Viljoen, Kit Rees and Juliette Laffont.

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