Political instability is now baked into France's investment landscape following the shock resignation of Prime Minister Sebastien Lecornu — and that could push investors to shun the country's domestic-focused corporates. Lecornu — who had been prime minister for just 27 days — quit on Monday just hours after naming his new government, following widespread criticism of his cabinet's composition. France's tricky fiscal situation makes it a standout challenge for investors looking for trading opportunities in Europe's equity markets. "The one area with that I would probably avoid is domestic France," said Nick Wylenzek, macro strategist at Wellington Management. "They are running a massive fiscal deficit, and ultimately the market will force them to do more drastic measures to rein in this fiscal deficit." Noting that populists from both the far-left and far-right together now comprise more than 50% of France's parliament, Wylenzek said that any measures to tackle the budget deficit would likely center around increased taxation rather than welfare cuts — and focus primarily on companies, not consumers. That, in turn, would hit French banks, infrastructure companies and telcos the hardest, Wylenzek told reporters at a Wellington event in London on Monday. "So within my view of being positive of domestic Europe, I think there are a lot more attractive opportunities outside of France than in France," Wylenzek said. Twists and turns Kevin Thozet, a member of the investment committee at Carmignac, said the ongoing upheaval will likely further fuel Europe's desynchronized growth environment. "France [is] being held back by political instability while Germany is supported by its stimulus plan and Southern Europe is buoyed by EU funds," Thozet said. France's CAC 40 index was last seen marginally higher on Tuesday morning, rebounding from the previous day, while French 10-year bond yields rose 0.013 points to reach 3.5821%. French banks were in negative territory shortly after 10:30 a.m. in London (5:30 a.m. ET) Tuesday, with BNP Pariba s down 0.9%, Societe Generale losing 1% and Credit Agricole sliding 0.6%. Orange , the telecoms giant, traded down 0.2%. Mabrouk Chetouane, head of global market strategy at Natixis Investment Management, said instability is "now part of the landscape" in France. "France has thus become ungovernable, much like Italy a few years ago, when the constant change of governments became commonplace," Chetouane said. With presidential elections not scheduled until at least 2027, however, Chetouane said the country is currently avoiding idiosyncratic distress. "Investors are passively following the twists and turns of French politics, trying to separate the noise from the signal," Chetouane said. "Investors and markets alike are hardly surprised by the political deadlock and have likely accepted that the situation will remain frozen until the next presidential election," he added. "In other words, there is a sense of déjà vu and there would therefore be no additional reason to give in to panic." 'Not a good omen' On Monday evening, French President Emmanuel Macron gave Lecornu 48 hours to break the political deadlock with rival parties, after which he may be forced to appoint a fourth prime minister since dissolving parliament in June last year. Looking ahead, Chetouane described another dissolution as a "perilous path" which would add uncertainty for investors and penalize an already fragile economy. Thozet added: "Unless the future candidate is a technocrat who manages to make the French electorate realize the importance of deficit problems and the French parliament reach some agreement, the budget deficit should remain somewhere between 5.5% or 6%. "Not a good omen for the French OAT-German Bund spread."
