As 2024 approaches its conclusion, the Paris CAC 40 index finds itself in a precarious position, reflecting a 3% decline throughout the yearThis downturn starkly contrasts with the notable increases observed in other major global stock indices, such as the Stoxx Europe 600, which rose by 6%, and the German DAX, boasting an impressive rebound of 18.7%. As one of the few markets within the global financial landscape to potentially close the year in the red, the situation in France raises alarm bells among investors and analysts alike.

A complex interplay of domestic political turmoil, ongoing budgetary pressures, and escalating trade tensions due to US tariffs has cast a shadow over the confidence in the French marketNotably, foundational industries such as luxury goods and automotive sectors have exhibited signs of fatigue, significantly contributing to the overall decline of the French stock market this year.

Political instability exacerbates market volatility

At the heart of France’s struggling market is its political instability which has proven detrimental to economic performance throughout the year

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The country has witnessed a rapid succession of four prime ministers, further undermining investor confidenceCurrent Prime Minister François Bayrou’s attempts to stabilize the budget deficit via fiscal policies have yielded limited resultsInvestor skepticism regarding the government’s effectiveness in executing policy reforms has resulted in the French 10-year bond yield exceeding 3%, marking the highest levels since the Eurozone debt crisis.

On December 4th, the French National Assembly passed a motion of no confidence against the government, which may lead to yet another cabinet reshuffleAccording to the French Constitution, former Prime Minister Barnier is set to deliver the resignation request to the President.

Goldman Sachs strategist Alexandre Stott posits that the passing of the no-confidence motion could have profound implications for the economic outlook of France.

“While Michel Barnier made some concessions on certain policies, such as postponing plans for power tax increases, he remains steadfast on the demands for pensions indexed to inflation,” Stott remarked to reporters. “Even if a budget agreement is finally reached, Goldman Sachs projects the fiscal deficit will approach 5.5% of GDP instead of the initially set goal of 5%. If negotiations fail, the government may have to resort to emergency powers, driving the deficit potentially upwards to between 5.5% and 6% of GDP.”

On December 14, Moody's downgraded France's credit rating, citing a “significantly deteriorating” economic outlook, which heightened market concerns regarding the sustainability and stability of its policies

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Roland Kaloyan, head of European equity strategy at Société Générale, commented, “The current complexity of factors in the market has led investors to steer clear of French stocks, a situation unprecedented in the past.”

In addition, proposals from the United States for stricter trade policies concerning imported goods have applied additional pressure on French export enterprisesObservers note that the uncertainties surrounding global supply chains are undermining French companies' competitiveness in the international arena, prompting investors to adopt a more cautious stance regarding future profitability.

Traditional industries under pressure

Key pillars of the French CAC 40 index, particularly the luxury goods sector, have posted disappointing results in 2024. Giants such as LVMH and Kering saw their stock prices plummet by 12% and 40% respectively over the year

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While demand for luxury products remained stable in European and North American markets, the slowing global economic growth and faltering demand in key export markets have overshadowed the industry's prospectsAfter a brief post-pandemic consumer recovery, the growth momentum of the luxury sector appears to be waning.

In recent years, the luxury sector had enjoyed a boost from heightened consumer enthusiasm and purchasing powerHowever, 2024 has abruptly halted this upward trend, with Barclays analyst Emmanuel Cau describing the year as “a painful one for the luxury industry,” and anticipates that growth rates might only reach 3% in 2025.

Meanwhile, the automotive industry, a vital pillar of the French economy, is also struggling to maintain momentumStellantis saw its stock price plunge by 41% over the year, reflecting the challenging circumstances faced by traditional car manufacturers in their transitionThe intensified competition in the electric vehicle sector, coupled with a slowdown in global economic growth, imposes dual pressures on the automotive market, forcing companies to navigate technological shifts and weak demand.

Companies seek alternative pathways

In light of the domestic market's malaise, French companies are increasingly seeking refuge in overseas capital markets

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