UBS considers 3 scenarios for the 2nd round of the French legislative elections

Investing.com - As the markets digest the results of the first round of the French legislative elections, UBS analysts have examined possible scenarios for the second round in a note published this Monday.

They first pointed out that the outcome of the first round of the French legislative elections, held last weekend, does not easily allow for predicting the results of the second round.

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With a participation rate of 65.8%, the highest since 1997, preliminary results show significant gains for parties at both extremes of the political spectrum. Exit polls place the National Rally (RN) in the lead with 33.2%, followed by the New Popular Front (NFP) with 28.1%, and Macron's Ensemble alliance with 21%.

UBS highlights that one of the most notable features of this first round is the high number of three-candidate races in the second round. For the first time since 1958, more than 250 constituencies will see three candidates compete, adding further complexity to predicting the final results.

UBS analysts believe that this situation could lead to a period of political instability in France. According to their forecasts, it is likely that no party will obtain an absolute majority in the National Assembly, which could result in a minority government or an assembly without a clear majority, making it difficult to pass any legislation.

More specifically, the UBS report identifies three possible scenarios:

• A minority government led by the RN with limited legislative power.
• A hung parliament, leading to a political deadlock and a government composed of moderate parties.
• A minority government led by the NFP, also with limited legislative power.

In terms of the market reaction, UBS already observes increased nervousness. Sovereign bond yield spreads have widened, and French stocks have underperformed compared to other European markets. Since June 7, French stock indices have dropped by 6.5% for large caps (CAC 40) and 12% for small caps (MSCI Small Caps index), while European indices (Euro Stoxx 50) have fallen by 3%.

In this context, UBS advises investors not to make drastic changes to their portfolio strategy based on political events. Instead, they recommend maintaining adequate diversification and considering structured investments with capital protection or yield generation features.

In summary, UBS analysts warn that uncertainty surrounding the second round of the French legislative elections could continue to weigh on the performance of French and European financial markets.