France feels the fiscal heat

Champions of fiscal rectitude frequently bemoan the fact the US has not posted a budget surplus since 2001. Washington’s inability to get on top of its spending risks undermining America’s economic leadership, warn the hawks. 

A French observer might be tempted to greet these admonitions with a Gallic shrug. After all, 25 years doesn’t seem so long ago for a country that has failed to balance its budget since Richard Nixon was in the White House.

Yet despite its fiscal insouciance, France has typically escaped the withering scrutiny of bond market vigilantes. It may not have been the cleanest shirt in the laundry basket, but there has assuredly always been a dirtier one – Greece or Spain, perhaps, or that perennial bond market worry Italy. That is until now.

Since government bond yields started to move higher in the spring, French debt has been in the vanguard. At the time of writing, French 10-year yields are above their Greek, Italian and Spanish equivalents. The spread over German 10-year bonds is as high as it has been since Europe’s sovereign debt crisis 15 years ago.¹

What appears to be aggravating investors isn’t just the original sin of a less-than-pristine balance sheet but a discordant political landscape that makes meaningful fiscal consolidation painfully difficult to achieve. 

Passing the PIIGS

French bond yields now exceed those of the euro-zone’s former problem children

The price of dysfunction

Nor is the damage limited to fixed income markets. The CAC40, France’s leading equity index, has been the weakest of the major European bourses, year to date.²

While a higher risk premium across French equities is perhaps understandable at this present juncture, we think it is a blunt tool that fails to discriminate between companies with markedly different fundamentals.

Like any equity index, the CAC40 is a collection of businesses of varying degrees of quality, financial strength and resilience. Not all will be impacted equally by a further deterioration in France’s fiscal predicament in our view.

Banks and domestically exposed companies are likely to feel the greatest pressure, given their sensitivity to sovereign spreads, domestic demand and credit conditions. However, we believe large multinational constituents with significant international earnings should be more insulated from the domestic narrative.

The French companies we invest in fall into the latter category. Each derives the bulk of their revenues from overseas operations and customers. Indeed, we believe it is more accurate to think of companies like Safran, TotalEnergies and Air Liquide as global champions that by chance happen to be headquartered in France.

The same is true of consumer-facing holdings Hermès, LVMH and L'Oréal. While they might appear more vulnerable to a deterioration in demand and credit conditions in their country of domicile, France accounts for only a small percentage of sales.

Luxe sans frontières 

Revenues at LVMH and Hermès are truly global

Another factor to consider is the potential impact of a higher cost of capital. Here too, we believe these companies are well positioned. They are cash generative, maintain strong credit profiles and, in most cases, employ relatively little leverage.

Hermès, Safran and Dassault Systèmes, for example, have net cash balance positions. AA rated L’Oréal has a net debt position of just over €2bn, which is comfortably covered by more than €7bn in annual free cash flow.

Reflecting TotalEnergies global profile, almost 80% of its debt is denominated in US dollars. Air Liquide, meanwhile, recently issued five and 10-year euro bonds at a discount to French government bonds.

LVMH is a sizeable bond issuer but should be relatively insulated from higher borrowing costs in our view. Robust cash generation, declining net debt, a strong credit rating and a well-spread debt maturity profile should provide considerable financial flexibility.

Lessons from London

While the two situations are not wholly analogous, investors can perhaps draw some parallels from the market’s reaction to the UK’s most recent experiment with fiscal incontinence – former prime minister Liz Truss’s now infamous mini-budget in September 2022.

Then, a package of largely unfunded fiscal measures aimed at stimulating growth triggered an abrupt – but unequal – sell-off in UK assets.

While gilts and the pound came under intense pressure, the equity market impact was more nuanced. Many domestic-focused and interest-rate-sensitive companies were hit hard. By contrast, globally diversified companies proved more resilient, supported by overseas earnings and limited reliance on the UK economy.

Of course, Truss's moonshot was the archetypal short, sharp shock, ending with her resignation little more than three weeks later. For now, France's fiscal malaise appears more chronic than acute.

Next year’s presidential election could catalyse a reckoning, however. A potential run-off between Marine Le Pen’s right-wing National Rally and Jean-Luc Mélenchon’s leftist France Unbowed parties is not a prospect to fill markets with confidence. While the former’s recent conversion to fiscal discipline has yet to convince, the latter is outright hostile to the idea of consolidation.

Given the current backdrop, further volatility seems likely, and the market's France discount may yet widen. We believe, however, that global-facing companies with solid financial profiles can continue to compound value over the long term, largely sheltered from the dysfunction at home.

¹ Source: Trading Economics, as at 8 October 2026
² Source: Bloomberg, as at 9 October 2026