Policy uncertainty rises ahead of France's 2027 election, and multi-asset risk premia may continue to move higher
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Policy uncertainty rises ahead of France's 2027 election, and multi-asset risk premia may continue to move higher
Morgan Stanley believes France will simultaneously face the 2027 budget, the presidential election, and a possible early parliamentary election over the next 12 months, with fiscal constraints, tax risks, and political fragmentation affecting equity, bond, credit, and FX markets.
- The 2027 budget will be difficult to pass; even if approved, fiscal consolidation is expected to be limited, with the deficit likely stable at 5.2% of GDP; without a budget, the deficit could rise to 5.9%.
- The French presidential election will be held on April 18 and May 2, 2027, and the report emphasizes that polling may shift significantly in the weeks before the vote, making it too early to lock in an outcome now.
- Equity strategy believes French election risk could start to be priced 4 to 6 months before the event, and corporate tax surcharges and new tax proposals will weigh on French equities.
- Rates strategy expects French government bonds to continue to modestly underperform peers, though the extent may be limited because part of the political risk is already priced in.
- Credit strategy argues that the transmission of sovereign risk into corporate credit remains underestimated, and French bank credit spreads are more sensitive to political and rating risk.
- FX strategy recommends shorting EUR versus CHF and SEK to hedge French political risk and the euro risk premium arising from the ECB's turn toward rate cuts.
Report interpretation
Overview
This report builds a multi-asset analytical framework around key political and fiscal events in France from 2026 to 2027. Morgan Stanley believes France will go through the 2027 budget process, the presidential election in April-May 2027, and a possible early parliamentary election in June 2027 over the next 12 months. Given a fragmented National Assembly, a high fiscal deficit, and continuing disputes over pension reform and tax policy, French policy uncertainty is expected to remain elevated and create risk premia across equities, rates, credit, and FX assets.
Core views
The core views are: first, there is still a path for the 2027 budget to pass, but fiscal consolidation will be limited and the temporary corporate tax surcharge may be extended; second, the presidential election outcome is highly uncertain, and polling and candidate platforms may not become clear until the final weeks before the vote; third, the next president will likely face a hung parliament or rely on a coalition, with marginal coalition partners significantly affecting policy outcomes; fourth, French equities may come under pressure from the start of budget season, with tax risk, OAT spreads, and political headline risk affecting valuations; fifth, French government bonds, bank credit, and the euro still face further upside in risk premia.
Analysis framework
The report uses a combination of event timelines, historical election experience, fiscal scenario analysis, polling and parliamentary structure assessment, cross-asset relative value frameworks, and sector exposure screening. The macro section analyzes the budget, the presidential election, parliamentary elections, and the EU multiannual fiscal framework; the equity section assesses the potential impact of corporate taxes, dividend taxes, buyback taxes, and income-profit mismatch taxes; the rates, credit, and FX sections respectively assess relative OAT performance, transmission of sovereign risk into bank credit, and the euro's political risk premium.
Methodology notes
Links the budget, presidential election, parliamentary election, and EU fiscal framework negotiations into an investment risk path.
The report believes the 2027 draft budget will gradually become clearer in August-September 2026, with parliamentary review starting in October; the presidential election will be held on April 18 and May 2, 2027; if the new president dissolves parliament, an early parliamentary election could take place in June 2027.
Uses whether the budget passes as a gauge of France's fiscal path and policy room for maneuver.
The base case is that the 2027 budget passes but with limited consolidation, leaving the deficit at about 5.2% of GDP; without a budget, the deficit could rise to 5.9% of GDP, with fiscal constraints and political uncertainty increasing further.
Assesses how political uncertainty is transmitted through tax expectations, sovereign spreads, bank credit, and the euro risk premium.
The report argues that French equities will face tax and headline risk, OATs will continue to modestly underperform, French bank CDS still do not fully reflect sovereign risk, and the euro may come under pressure from political risk and changes in the rate cycle.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- French equitiesHighly exposed to election, tax, and OAT spread risk
- Strengths
- The market has already priced in some political risk and the corporate tax surcharge to a certain extent, and the fundamentals of globally oriented stocks may not fully depend on domestic French demand.
- Weaknesses
- Discussion of new corporate taxes, dividend taxes, buyback taxes, and tax-base mismatch measures could create valuation pressure ahead of the election.
- Comparison
- Both domestic and globally exposed stocks may be affected, but globally oriented stocks may be less fully priced for the known tax surcharge.
- Risks
- Political headline risk, extension of the corporate tax surcharge, post-election budget revisions, wider OAT spreads.
- French OATsPolitical uncertainty and expectations of fiscal deterioration may lead to relative underperformance
- Strengths
- Valuation models show French bonds are already somewhat cheap, suggesting part of the political risk is already reflected.
- Weaknesses
- Uncertainty over budget execution, a high deficit, and downgrade risk will still weigh on performance.
- Comparison
- French bonds are still expected to modestly underperform European peers further.
- Risks
- Budget failure, deficit rising to 5.9% of GDP, weaker market risk appetite, rating downgrades.
- French corporate credit and bank CDSTransmission of sovereign risk into corporate credit is seen as underestimated
- Strengths
- The relative-value trade of buying protection on French bank CDS and selling protection on iTraxx Senior Financials can reduce some directional market risk.
- Weaknesses
- French banks have high beta to sovereign spreads and rating risk.
- Comparison
- French corporate credit has not kept pace with the widening in OAT spreads, and the gap between corporate and sovereign yields is near a ten-year low.
- Risks
- French sovereign spreads staying stable while broader financial CDS widen, deterioration in bank fundamentals, rising rating sensitivity.
- EUR versus CHF and SEKUsed to hedge French political risk and a rising euro risk premium
- Strengths
- A long CHF and SEK basket can reduce single macro exposure to risk assets and oil prices.
- Weaknesses
- SEK is affected by energy prices and global manufacturing expectations, while CHF is affected by Swiss National Bank policy signals.
- Comparison
- The report believes EUR may shift from a carry-trade currency to a funding currency.
- Risks
- A rebound in energy prices hurting Sweden's terms of trade, or a clearer SNB stance to restrain CHF appreciation.
- French bank equitiesHigh exposure to political headlines, taxes, and capital markets union policy risk
- Strengths
- SocGen is seen as the relative preferred name among French banks due to a stronger idiosyncratic story and upside potential.
- Weaknesses
- French banks are sensitive to dividend taxes, buyback taxes, sovereign spreads, and rating risk.
- Comparison
- Preference order is SocGen > BNP > Crédit Agricole; the report says French banks are not in Top Picks.
- Risks
- An RN majority could slow the Capital Markets & Banking Union, while tax policy changes could pressure returns on capital.
- Luxury sectorEarnings are sensitive to changes in French corporate tax rates
- Strengths
- LVMH, Hermès, Kering, and Richemont still have global brands and international revenue bases.
- Weaknesses
- A higher tax rate would directly affect EPS, and the report mentions about 6% EPS downside risk for Hermès.
- Comparison
- Current consensus has not fully incorporated the French tax surcharge beyond 2026 for LVMH or Hermès.
- Risks
- Extension of the corporate tax surcharge, higher tax-rate assumptions, and continued French political risk pressuring valuations.
- UtilitiesPolitical risk is reflected more through sentiment, positioning, and regulatory expectations
- Strengths
- Because of the nature of its business, Veolia's fundamentals face relatively limited risk from the 2027 presidential election.
- Weaknesses
- Engie may face energy price control risk under scenarios of an absolute RN or LFI majority.
- Comparison
- Veolia has the lowest fundamental risk, while Engie and Voltalia have higher fundamental risk; Engie also has higher positioning risk.
- Risks
- Energy price controls, worsening investor sentiment, and post-election position adjustments.
Key data
- Report date2026-07-28The first page of the report shows July 28, 2026 04:34 AM GMT.
- Presidential election dates2027-04-18 / 2027-05-02These are the first and second rounds of the French presidential election, respectively.
- Presidential handover2027-05-14The report states that President Macron's term ends and the next president takes office.
- Possible early parliamentary electionAround mid-June 2027The base case assumes the new president may dissolve the National Assembly and trigger an election.
- 2027 budget deficit base case5.2% of GDPScenario in which the budget passes but fiscal consolidation is limited.
- No-budget scenario deficit5.9% of GDPIf the 2027 budget is not passed, the fiscal situation could deteriorate significantly.
- Historical threshold for second-round qualificationAverage around 19%Since 1995, the third-place vote share has ranged from 16.2% to 22.0%.
- Marine Le Pen current first-round polling30% to 35%The report says this level is near a historical high.
- Senate elections日期2026-09-27Covers 178 seats and may reflect the local political landscape ahead of the 2027 election.
- French bank CDS relative tradeBuy protection on French bank CDS and sell protection on iTraxx Senior FinancialsThe report believes French fiscal and political risk is not yet fully reflected in French bank CDS.
Impact & implications
From an investment perspective, French political risk may gradually enter asset pricing during budget season and before the election. In equities, investors may avoid companies more exposed to corporate taxes, dividend taxes, buyback taxes, and the French income-profit mismatch tax; in rates, French OATs still face modest relative underperformance risk versus European peers; in credit, French banks are more vulnerable because of sensitivity to sovereign spreads and ratings; in FX, the euro may shift from a high-yielding currency to a funding currency, and short EUR versus CHF and SEK can serve as a political risk hedge.
Risks
- France's 2027 budget fails to pass, causing the deficit to rise to 5.9% of GDP.
- The presidential election and subsequent parliamentary election outcomes are highly uncertain, and a hung parliament or fragile coalition could limit policy execution.
- Corporate tax surcharges, dividend taxes, buyback taxes, or other tax proposals could pressure equity valuations and earnings expectations.
- French OAT spreads widen further and transmit into bank credit and equity risk premia.
- Rating agencies further downgrade France's sovereign rating, although the report believes the market impact may be limited.
- Scenarios such as an absolute RN or LFI majority could increase regulatory risk for banks, energy, and utilities.
- The euro risk premium rises, while hedging trades such as EUR versus CHF and SEK remain exposed to central bank and energy-price disruptions.
What to watch
- Details of the 2027 draft budget to be released by the government in August-September 2026.
- The October 2026 budget review and whether the government invokes Article 49.3.
- If budget deliberations fail to produce a result, whether the budget will be advanced via ordinances after mid-December 2026.
- The French Senate elections on 2026-09-27 and whether RN forms a Senate group for the first time.
- Whether candidates can secure endorsements from 500 locally elected officials by March 12, 2027.
- The results of the first round of the presidential election on April 18, 2027 and the second round on May 2.
- Whether the new president dissolves the National Assembly and triggers an early parliamentary election in June 2027.
- Whether the post-election government quickly revises the budget in summer 2027 and introduces a new corporate tax plan.
- Whether negotiations on the EU 2028-2034 Multi-annual Financial Framework reach a political agreement before the end of 2026.
- French bank CDS, OAT spreads, relative performance of French equities, and the moves in EUR versus CHF/SEK.