Five Charts Show French Equities Coping With Election Jitters

How Will Markets React to Elections in France?

With two days to go before the first round of the French presidential election, equity investors seem relatively sanguine, with the CAC 40 trading just below a 20-month high hit last week and brisk investment inflows. French small caps, which are more domestic-orientated, have sold off this month, however. Here are five charts ahead of Sunday’s vote:

Investors have been pouring money into exchange-traded funds that invest in French stocks, undeterred by risks that anti-euro presidential candidate Marine Le Pen or far-left candidate Jean-Luc Melenchon should win the election, and focusing instead on the brisk recovery in corporate earnings. U.S.-listed ETFs have seen inflows in French stocks of $1.3 billion in the four weeks to April 13 alone.

Short sellers on the French equity market are circling shares again, however the level remains relatively muted. Borrowing of French stocks, an indication of bearish bets by short sellers, has risen to about 2.4 percent, after dropping to as low as 1.3 percent in March.

French large caps remain relatively cheap compared to their European peers. The CAC 40 trades at about 1.5 time book value, below the price-to-book ratios of Germany’s DAX, U.K.’s FTSE 100 and the broad Stoxx Europe 600.

The French index’s biggest names including LVMH, L’Oreal SA, Sanofi and Airbus SE have little exposure to the country’s economy, and a drop in the euro could favor them just as the plunging pound sent the FTSE 100 Index soaring to a record in the months following the Brexit vote. Members of the CAC 40 on average get only about a quarter of their sales from France, data compiled by Bloomberg show.

Smaller French stocks, which are more exposed to the domestic economy and would be more vulnerable if a populist candidate wins, have sold off in the run-up to the election. The CAC Small Index has fallen 4.4 percent since a peak on April 4, while the CAC 40 is 1.2 percent below its high reached last week. Technical charts show the CAC Small Index falling into oversold territory this week and finding support on its 100-day moving average, which could limit downside in the short term.

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