Politics

As if there weren't enough political news already in 2024, the last few days saw the collapse of the French government, the brief announcement of martial law in South Korea, and a relaunch of the UK's new government just five months after it took office with a huge majority. In the background, Germany remains in political limbo pending earlier-than-scheduled elections likely in the spring, and the Trump II administration is slowly taking shape.

To cut to the chase: each and all of these events could have significant economic and financial effects, but they needn't, and as yet haven't. As we have noted here so often, things which matter to us as people and citizens do not always affect economies and markets, which are narrowly impersonal. We follow events closely of course, but there can be a limit to what can usefully be said about them, and the correct investment advice can often be to ‘sit tight’.

Specifically, France's fifth republic is not yet facing a full-blown constitutional or economic crisis. The president remains in place, and the new caretaker PM, whoever that turns out to be, will be able to fund the day-to-day operations of government. France is not the US, and unlikely to face a government "shutdown".

When the budget impasse is broken, the outcome is unlikely to be a tougher fiscal stance than today's, and the episode does seem likely to amplify growing inflation risk in 2025 as less austere fiscal policy augments the effects of falling interest rates. But (even) more borrowing and spending is not necessarily a game changer, and the capital market reaction to date has been distinctly underwhelming – and may stay so.

For sure, French stocks and bonds have underperformed this year (remember, today's confusion was sparked by the unusually-early parliamentary elections at mid-year). Stocks have lagged the rest of the eurozone by roughly 10% in 2024 to date, while the 10-yr OAT-bund spread has widened by 30-40 basis points (and is now bigger than Portugal's, and very briefly Greece's). The euro has fallen 4-5% against the dollar. But these are not seismic changes. The bund spread has actually narrowed a little this week, and the euro's move at least partly reflects Trump's win.

Admittedly, there could be some potentially profound issues at stake: an alliance of far left with far right resonates uncomfortably. And France's sovereign credit rating is already subject to a ‘negative outlook’ at two agencies. But it is also possible to over-analyse and over-think things, and for now we do indeed feel that the best investment advice is to sit tight.