France and Germany are currently experiencing political turbulence that dampens investor sentiment.

The political instability in the Eurozone is expected to persist in the short to medium term. European stock markets are thus projected to underperform, dragged by the prevailing risk-off sentiment.

France: Lukewarm response

In France, President Emmanuel Macron has appointed Francois Bayrou as Prime Minister after the ousting of Michel Barnier.

Bayrou’s appointment – aimed at quelling a political storm that stemmed from disagreements over French budget proposals – has reportedly failed to ease public discontent.

Recent polls show Bayrou is not viewed favorably by the French public, with critics highlighting indecisiveness in the formation of his government and lack of clarity about his broader agenda, according to media reports.

Amid public skepticism and dissatisfaction over the economy, France’s political landscape is expected to remain unstable in the short to medium term.

Germany: Snap elections 



In Germany, the collapse of Chancellor Olaf Scholz’s coalition and the subsequent snap elections have introduced political uncertainty, potentially affecting government formation.

The coalition disbanded due to conflicts over fiscal policies aimed at stimulating economic growth and supporting Ukraine. A snap election is scheduled for February to resolve the political deadlock following the coalition’s collapse. It is only the fourth snap election in Germany and underscores a period of political instability.

Forming a new coalition could take several weeks or months after the snap election. This extended period of uncertainty could erode investor sentiment and activity. In 2005, European stocks declined by 1% ahead of a snap election due to increased tensions.

Takeaway

French stocks showed volatility following the appointment of Bayrou, with the CAC 40 Index declining by up to 2.0%. Meanwhile, German stocks experienced a sell-off of about 2.7% after Scholz lost a vote of confidence.

Related article: Trade war, price swings, and more face big economies 

An underweight stance on the Eurozone is maintained due to continued political uncertainty. The region’s economic growth will likely remain subdued amid the ongoing manufacturing contraction along with weak consumer and business confidence.

(Disclaimer: This is general investment information only and does not constitute an offer or guarantee, with all investment decisions made at your own risk. The bank takes no responsibility for any potential losses.)  

SOPHIA THERESE “PIA” BONIFACIO is a Markets Research Analyst at Metrobank’s Trust Banking Group, covering local and offshore macroeconomic research. She obtained her Bachelor’s degree in Economics with a Specialization in Financial Economics, cum laude, from the Ateneo de Manila University and is a Certified UITF Sales Person (CUSP). Pia enjoys long road trips and is a self-proclaimed milk tea connoisseur.

ANNA DOMINIQUE CUDIA, MBA, CSS, is the Head of Markets Research at Metrobank’s Trust Banking Group, spearheading the generation and presentation of financial markets insights to clients. She used to be with Metrobank’s Investor Relations, where she brought in international awards and took part in various multi-billion peso and dollar capital raising activities. She holds a Master of Business Administration (Finance) degree, with distinction, from the University of London, and industry certifications in finance. She is a naturally curious person and likes to travel here and abroad.