Goldman strategists predict that French stocks may face even greater risks due to political instability.

• Goldman Sachs strategists predict that French stocks will face additional political risk-related losses in the near future, although this will be concentrated in specific regions.
• The blue-chip stocks on Paris's CAC 40 index experienced their poorest performance since March 2022 last week.
• Sharon Bell, a senior European strategist, believes that the decision to sell off all French stocks may have been a hasty reaction.

Goldman Sachs strategists predict that French stocks will face more political risk-related losses in the near future, with a specific focus on certain regions.

The blue-chip stocks on Paris's CAC 40 index experienced their worst performance since March 2022, falling over 6% last week, following the announcement of a snap election in the country.

The prospect of the National Rally's victory in the legislative elections and the potential for populist fiscal policy, bank measures, and a Liz Truss-style financial crisis caused markets to be instantly spooked.

The widening of the spread between French and German 10-year bond yields by 25 basis points coincided with an equity sell-off and an increase in borrowing costs.

Goldman strategists expect that spread to remain wide in the coming weeks.

Goldman strategists predict that maintaining pressure on French domestic stocks, particularly banks, which are highly reactive to sovereign spreads, is likely to occur.

The French domestic giants are supermarket chain, construction firm, and utility, while its internationally focused powerhouses are companies like , , and .

Amid elevated political uncertainty, Goldman advises looking to defensive sectors such as health care in the short term.

If the National Rally wins the rally, it is likely to harm French domestic stocks, according to the investment bank. However, if the party remains focused on winning the 2027 presidential election, it could prove more business-friendly than expected in the long run.

The possibility of a hung parliament and political deadlock could decrease the likelihood of a violent market reaction but may align with broader sovereign spreads, negatively affecting specific domestic stocks.

CAC 40 exposure

Goldman's senior equity strategist, Sharon Bell, states that the CAC 40 as a whole has approximately 20% French exposure.

Bell stated on "Squawk Box Europe" on Monday that the upcoming French election is adding an extra risk premium to France, despite the French exposure not being zero.

"Some of the companies in this market are highly valued and generate a lot of revenue outside of France, which accounts for 80% of the market," she stated.

"We believe that the decision to sell off all French stocks has been too hasty, and we argue that small caps and domestic French names are the most vulnerable."

She stated that a broader perspective on political risk in Europe contributes to the region's valuation gap with the U.S.

Bell stated that when he talks to global clients, particularly those in Asia and the U.S., about investing in Europe, political risk is often the first topic discussed. He believes that the gap between Europe and the U.S. will not completely close, but may narrow slightly, which is their view. However, he emphasized that this will not happen due to certain risks.