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LIVE MARKETS-Stay away from France for now, it's not Italy, JPMorgan says

By Reuters News

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STAY AWAY FROM FRANCE FOR NOW, IT'S NOT ITALY, JPMORGAN SAYS

French assets may remain stuck in the political crossfire for longer than investors expect. JPMorgan says key election risks must first be cleared before a sustained recovery can take hold, warning that France is unlikely to follow Italy's post-2022 market playbook.

The brokerage said French domestic stocks and banks could see a relief bounce after their underperformance, but until the election is out of the way, they recommend investors steer clear.

""We do not think investors will be able to sustainably re-engage with French exposure until after the main event risks are behind us. We believe a pair trade of OW non-French domestic exposure vs French is likely to keep working, medium term," the bank's analysts said.

Domestic valuations aren't cheap against their own history. Banks haven't fully priced in near-record-wide French spreads over Bunds, currently not far from 160 basis points, and earnings don't yet reflect bearish macro scenarios.

Market watchers have cited Italy, which was groaning under an Italy/Bund spread of over 250 bps when far-right Prime Minister Giorgia Meloni came to power in 2022. Despite concerns about her ability to rein in Italy's finances, that election produced a stable government. The centre-right coalition held a Lower House majority, worked cooperatively with European institutions, and benefited from existing reforms, JPMorgan said.

Italy/Germany spreads have risen this year to around 118 bps, but they remain well off the pre-2022 peaks.

France looks different, JPMorgan said. Minority governments and a deeply divided French electorate have hampered France's ability to improve its longer-term finances. Markets will want a government that can govern, and until then, JPMorgan is staying selective.

(Kanishka Ajmera)

EARLIER ON LIVE MARKETS:

BEFORE THE BELL: UPBEAT START TO A BUSY WEEK CLICK HERE

ELECTIONS, CENTRAL BANKS, AND EARNINGS ON THE MENU CLICK HERE

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