June 2024

The main stock markets had contrasting performances in June. The EuroStoxx 600 fell by -1.2% while the S&P 500 and the Nasdaq rose by 3.5% and 6.2% respectively between May 31 and June 28.

The main event of the month for the European stock market was the surprise dissolution of the National Assembly by the French president. Usually, elections follow each other without having a major impact on the market, but this unexpected parliamentary election is rightly an exception. It shows the utter lack of popular support in France for the so-called “structural” economic reform program, such as the pension reform and the raising of the statutory retirement age to 64, which had reassured international investors and European partners. The two most powerful political forces in the country are simply proposing a return to old measures and presenting a comprehensive package of spending and new taxes to finance them.

One could criticize the record of the outgoing government, which leaves behind a public deficit of 5.5% of GDP, well above the targets required by Brussels, even without a recession. This once again demonstrates that the country structurally spends too much. But this is not the only issue. The problem that has now come to light for France is that it is no longer politically capable of implementing significant measures to reduce its public spending, which are necessary to remain in the Euro. The population clearly does not want this. But the other European countries are not ready to foot the bill for the French either.

The consequence of this deadlock can only result in a collision between two irreconcilable desires: to remain in the Euro and not balance its public accounts.  This is why the market immediately increased the spread between French and German debts on June 12, which in effect is the country’s risk premium.  If this spread were to widen too much, the country would simply lose access to credit and could no longer finance its deficit.  The salaries of civil servants and pensions would have to be cut immediately. A recession would follow.  The market’s warning is clear and must be taken very seriously.

Such a conflict has a precedent: in 2014, the Greek party Syriza was elected promising the end of austerity but without having a way to self-finance.  The prospect of leaving the Euro ultimately forced the Tsipras government to back down. Everything suggests that it would be the same in France, as leaving the single currency would be a leap into the unknown in everyone’s eyes.

Therefore, the increase in the premium on France and the decrease in the stock market of companies most exposed to the French economy seem justified to us. The premium will subside only once the necessary austerity of public spending has been accepted by the next government, whoever it may be. Until then, we have decided to decrease our exposure to France in our portfolios.

The Clartan funds are down in May: Valeurs drops by -2.1%, Europe -8.6%, Ethos -7.3%, Evolution -2.8%, and Patrimoine remains stable at 0.0%.