France's Political Crossroads: Navigating Policy Risks and Valuation Opportunities in Eurozone Equities

The political turmoil engulfing France has created a paradox for investors: near-term stability in markets contrasts with long-term risks of legislative gridlock. Prime Minister François Bayrou's narrow survival of a no-confidence vote in early July 2025 has temporarily eased immediate fears of market chaos. Yet the fragile minority government's struggle to pass the 2026 budget and reform stalled pension policies highlights systemic vulnerabilities. For equity investors, this duality presents a strategic dilemma—avoiding sectors exposed to policy uncertainty while capitalizing on undervalued defensive plays in Eurozone equities.

The Near-Term Calm: Bayrou's Survival and Market Reactions
Bayrou's government narrowly averted collapse when a no-confidence motion failed in July, but the victory was pyrrhic. The Socialist Party's withdrawal of support, coupled with the far-right National Rally's (RN) threat to block the 2026 budget, underscores the government's precarious position. While markets have reacted positively to reduced short-term risks—

—the underlying gridlock remains unresolved.

The CAC 40's 8.4% year-to-date gain in euros reflects reduced political uncertainty, but the index's valuation multiples are now near their 10-year average. This leaves little room for error if reforms stall further.

Sectoral Exposure: Where the Risks Lie

1. Utilities/Infrastructure: Budget Cuts and Regulatory Uncertainty
   The 2026 budget, which includes €30 billion in spending cuts, directly threatens utilities and infrastructure firms reliant on state funding. Bayrou's reliance on Article 49.3 to bypass parliamentary approval highlights the government's reluctance to confront austerity head-on.
2. At Risk: Companies like Engie (ENGI.PA), which depends on public subsidies for renewable projects, and Vinci (DGFP.PA), whose infrastructure ventures face delayed approvals.

3. Risk Factor: If the RN blocks the budget over fiscal slippage, spending cuts could deepen, further pressuring these sectors.

4. Consumer Discretionary: Wage Stagnation and Pension Disputes
   The collapse of pension reform talks has left France's retirement age policy unresolved, dampening wage growth expectations. This weighs on consumer discretionary firms tied to discretionary spending.

5. Exposure: Luxury brands like LVMH (MC.PA) and Kering (PRTP.PA) may see muted demand if households prioritize savings over consumption.

6. Data Point:

7. Financials: Policy Stability vs. Election Volatility
   Banks like BNP Paribas (BNPP.PA) and AXA (CS.PA) benefit from reduced political uncertainty but face risks if Macron calls snap elections. A weakened euro—already down 5% against the dollar in 2025 due to France's fiscal woes—could amplify volatility.

8. Wild Card: A RN-led no-confidence motion could force early elections, destabilizing Macron's presidency and spiking eurozone bond yields.

The Long-Term Opportunity: Defensive Plays in Eurozone Equities
While France's gridlock persists, investors should focus on sectors insulated from domestic policy risks but exposed to Eurozone structural growth.

• Healthcare: Steady Demand and Regulatory Safety
  Pharmaceutical and medical tech firms, such as Sanofi (SAN.PA) and Siemens Healthineers (SHL), benefit from steady demand and less reliance on government spending cuts.
• Tech: Digital Transformation and EU Funding
  Companies like SAP (SAP.GR) and ASML (ASML.AS) are beneficiaries of the EU's digital and green transition funds, which remain unaffected by French politics.
• Data Edge:

Investment Strategy: Underweight CAC 40, Overweight Defensives
- Underweight CAC 40: Avoid cyclical sectors until Bayrou's government secures the 2026 budget. The index's near-average valuation offers limited upside cushion.
- Overweight Eurozone Defensives: Target healthcare and tech stocks with exposure to EU structural reforms. Consider ETFs like the iShares MSCI Eurozone UCITS ETF (EZU) for broad exposure.
- Hedged Plays: For euro volatility, pair long positions in defensive sectors with euro-dollar put options.

Conclusion
France's political instability is a double-edged sword: it averts immediate market chaos but delays reforms critical to long-term growth. Investors should treat the CAC 40 as a high-risk trade until gridlock resolves, while deploying capital in Eurozone sectors insulated from domestic strife. The window for opportunistic buying in healthcare and tech remains open—provided investors keep one eye on the political horizon.