German blue-chip stocks show more promise than their French counterparts, Barclays’ strategists wrote in a note on Friday. They noted that France has weak long-term fiscal and growth fundamentals, and a looming risk of bond vigilantes sweeping in. Germany is battling an ongoing manufacturing downturn, with a dispute over its budget and long-term fiscal strategy causing its government to collapse earlier this month.
France, on the other hand, is facing years of potential political uncertainty, with no party or faction having a majority in parliament. The country is also struggling to reduce its large debt pile and avoid credit rating downgrades.
Barclays strategists maintain their preference for Frankfurt’s DAX stock index over Paris’s CAC 40, citing the German economy’s stronger fundamentals. They predict that if France’s government falls, the spread between German and French government debt could widen, pushing the CAC index down by 4% to 5%.
However, if the government passes the budget, the spread could narrow, potentially boosting the CAC index by 2% to 3%. The strategists also warn that bond vigilantes would likely step in if the government fails to pass the budget or if a stable government does not form.
French borrowing costs have risen above Germany’s this year, with investors spooked by political instability. Investors are concerned about whether the government can reduce its debt pile and avoid credit rating downgrades.
“The fact that investors are demanding the same interest for holding French bonds as for that of historically unstable Greece is a significant milestone,” said the strategists.
Jane Foley, senior FX strategist at Rabobank, is not convinced, stating that there is a risk of worsening political and budget outcomes in France sparking contagion through the euro zone, reflected in rising bond yields and a weaker euro.