In September, European equities were once again outperformed by their US counterparts: the Stoxx Europe 600 fell by -2.4%, while the S&P 500 rose by +2.1% and the Nasdaq by +4.4%, led in particular by the semiconductor sector (SOXX Index), which advanced by +14.1% over the month.
While global economic momentum remains largely confined to investment related to artificial intelligence and the industrial cycle, the bond crash in longer-dated maturities continued in September. And one country in particular now seems to be in the eye of the storm: France. As we write, the 10-year yield spread with Germany has reached nearly 1.3%. More than the level itself, it is the speed of the deterioration that is causing concern.
It therefore seems that what many feared—a sell-off in French debt—is happening before our eyes, and we will not return to the status quo ante without profound changes. Since COVID and the now-famous whatever it takes approach, the deficit has not been brought down to even the very modest 3%, and meanwhile interest rates having risen from 0% to 5%. Because of excessively high structural spending, the deficit remains above 5% of GDP, with no prospect of natural improvement. With moderate inflation and virtually no growth, this situation is mathematically unsustainable.
Faced with creditors’ refusal to keep pouring money into a bottomless pit, the only solution is a drastic austerity program affecting every segment of the population without exception. But this medicine is so politically bitter that no government can bring itself to take it unless forced to do so—in this case, by the markets.
Like a patient with an excruciating toothache who goes to the dentist to have a tooth pulled without anaesthesia, the current government will therefore be forced in the coming weeks to introduce a budget reminiscent of those adopted in Portugal or Spain from 2012 onward. A brief selection of measures taken at the time: an outright 10% cut in public-sector staffing, a 10% increase in public servants’ working hours with no salary compensation, a VAT increase, a freeze and below-inflation indexation of pensions, etc.
Needless to say, such a budget could only be passed by decree and would immediately be followed by a motion of no confidence that would bring down the government. We can reasonably assume that it would then remain in office in a caretaker capacity until the April 2027 presidential election, after which all eyes would turn to the winner.
One thing is now more or less certain: the drastic budget adjustment and structural measures that have been repeatedly postponed since 2012 and 2020 will finally take place, because investors have lost confidence in French politicians’ ability to take measures that will protect their capital over the long term.
Faced with this scenario, which does not surprise us and whose timing alone was unknown to us, we have long positioned our portfolios to limit its impact. Our exposure to French domestic companies has been reduced to a bare minimum, and we are waiting for forceful and painful measures to be taken before returning to the many excellent companies listed on the French market.
The Clartan funds followed European equities lower in September: Valeurs fell by -2.0%, Europe by -3.8%, Ethos by -3.4%, Flexible by -2.1%, Patrimoine by -1.6% and Multimanagers by -2.2%.
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