French Elections: Why Investors Should Look to FCFA Assets Amid Uncertainty

As France heads into a crucial second round of snap parliamentary elections on July 7, 2024, the political landscape is more uncertain than ever. 

With the far-right National Rally party gaining momentum and the potential for a significant shift in economic policies, French investors and Euro earners may be looking to diversify their portfolios. 

One often-overlooked option that deserves consideration is FCFA-denominated African bonds and stocks.

Here’s why these investments could be attractive in the current climate.

The French Election Shakeup

Before delving into African investments, let’s recap the situation in France:

• President Emmanuel Macron called snap elections after his centrist alliance performed poorly in the European Parliament elections
• The far-right National Rally, led by Jordan Bardella and Marine Le Pen, secured a lead in the first round with 34% of votes
• A potential “cohabitation” scenario could emerge, with Macron as president but a National Rally-led government
• With the far-right National Rally party gaining momentum, there’s a real possibility of significant policy shifts that could impact French and European markets.

This political volatility makes a strong case for geographic diversification. African markets, particularly those using the FCFA (Franc CFA), offer an interesting alternative that’s still connected to the Eurozone.

Implications of Far-Right-Led Government on Markets

The French far-right National Rally (RN) party’s strong electoral performance has introduced a new era of fiscal conservatism and market uncertainty. French stocks and the euro rallied on Monday. 

The CAC 40 index rose 1.5% following the first round, with bank stocks showing significant recoveries: Societe Generale up 4.3%, Credit Agricole 3.8%, and BNP Paribas 3.4%.

Jean-Philippe Tanguy, RN’s financial point man, has pledged to reduce the deficit to 3% of GDP by 2027 and adhere to EU fiscal rules. This commitment has somewhat calmed market fears, though concerns persist about the feasibility of the RN’s economic program, particularly their promise to reduce VAT on energy from 20% to 5.5%.

The potential tight fiscal policy could significantly impact financial markets. Bond yields may initially rise as investors demand higher returns for perceived increased risk. However, successful implementation of fiscal restraint could stabilize or decrease yields long-term, potentially narrowing the spread between French and German bonds.

In the stock market, sectors reliant on government spending might face challenges, while those benefiting from the RN’s pro-business stance could outperform. The banking sector might continue to benefit if fiscal discipline leads to a more stable economic environment.

The euro reached its strongest level against the dollar in over two weeks, indicating cautious international confidence. However, market volatility is expected as investors adapt to the new political landscape.

The coming weeks will be crucial as markets monitor the new government’s formation and initial policy announcements. The RN’s ability to balance populist promises with fiscal responsibility will be key in maintaining investor confidence and economic stability in this new era of French politics.

The FCFA Connection: A Familiar Yet Distinct Currency

The FCFA, used in 14 African countries, maintains a fixed exchange rate with the Euro. This connection provides a level of familiarity and stability for Euro-based investors while offering exposure to fast-growing African economies.

Key benefits of the FCFA for French investors include:

1. Currency stability: The fixed exchange rate minimizes currency risk. The peg is guaranteed by the French Treasury, offering an additional layer of security
2. Familiarity: The historical ties between France and FCFA countries make these markets more accessible
3. Diversification: FCFA assets provide exposure to different economic drivers than European markets
4. FCFA zone countries have generally maintained lower inflation rates compared to other African nations

The average inflation rate in FCFA countries was 3.7% in 2023, compared to 16.2% for Sub-Saharan Africa as a whole.

Economic Growth in FCFA Zone Countries

Many FCFA-zone countries are experiencing rapid economic growth. 

• The IMF projects Sub-Saharan Africa to grow by 3.8% in 2024, outpacing global growth estimates
• Specific FCFA countries like Côte d’Ivoire and Senegal have even higher projected growth rates at 6.5% and 8.3% respectively
• Four of the 10 fastest-growing African economies in 2024 are in francophone West Africa (real GDP)
• This compares favorably to the 0.7% growth forecast for France in 2024 by the OECD
• Sectors such as telecommunications, financial services, and natural resources are driving growth in the WAEMU region

This economic expansion creates opportunities in both equity and fixed-income markets:

• Equity markets: Growing consumer markets and infrastructure development are driving corporate growth
• Bond markets: Government and corporate bonds often offer higher yields than comparable European issues

Also Read: Ivory Coast Rises: Economic Growth, Oil Discoveries, and a Booming Stock Market

Diversification Benefits

Investing in FCFA-denominated assets offers several diversification advantages:

1. Geographic Diversification: By investing in African markets, French & Euro investors can spread risk across different economic regions. This is particularly important given the potential for economic policy shifts in France and Europe
2. Sector Diversification: Many African economies are resource-rich and have growing consumer markets, offering exposure to sectors that may be underrepresented in European portfolios
3. Yield Opportunities: With European interest rates remaining low, FCFA-denominated bonds can offer attractive yields. For example, the yield on 10-year French government bonds was 2.8% as of June 2024

In contrast,

• Côte d’Ivoire 5.75% 2032 bond yield: ~8%
• Senegal 6.25% 2033 bond yield: ~9%

Emerging Stock Market Potential

While still considered frontier markets, many African stock exchanges are showing promise:

• Over the last decade, the BRVM posted an average return of more than 12% on its equity market and a return of over 6% on its bond market.
• This outperformed the CAC 40 (French stock market index), which returned 9.2% in the same period

Sectors to Watch in FCFA Stock Markets

Several sectors in FCFA countries show promise for equity investors:

1. Financial Services: Growing middle classes are increasing demand for banking and insurance products.
2. Telecommunications: Mobile penetration is rising, driving growth in data services and mobile money.
3. Consumer Goods: Urbanization and rising incomes are boosting consumer spending.
4. Infrastructure: Massive investments in energy, transportation, and urban development create opportunities.

Challenges and Risk Considerations

While FCFA-denominated investments offer opportunities, there are risks to consider:

1. Liquidity Concerns: African markets can be less liquid than developed markets, potentially making it harder to buy or sell assets quickly.
2. Political Risk: While the FCFA provides currency stability, individual countries may face political challenges that could affect investments.
3. Information Asymmetry: Obtaining detailed, reliable information on African companies and markets can be more challenging than for European investments.

Careful research and potentially working with local partners like Daba can help mitigate these risks.

How French Election Outcomes Could Impact FCFA Investments

The results of France’s snap election could have implications for FCFA investments:

• A victory for Macron’s centrist alliance might maintain the status quo in France-Africa relations.
• A strong showing by the National Rally could lead to shifts in France’s approach to its former African colonies.
• Left-wing success might result in increased development aid and economic cooperation with FCFA countries.

Investors should monitor these outcomes and their potential effects on FCFA economies and markets.

How to Invest in FCFA-Denominated Assets

For investors interested in exploring FCFA-denominated investments:

1. Research FCFA-zone country fundamentals and specific investment opportunities.
2. Consider working with fund managers and investment platforms specializing in African markets.
3. Explore ETFs or mutual funds focused on African bonds or equities through platforms like Daba for diversified exposure.
4. For direct investments, understand the regulatory requirements in both France and the target FCFA country.

Investing in FCFA assets requires a long-term view. These markets can be volatile in the short term, but patient investors may benefit from the region’s growth potential over time.

Also Read: African Economic Outlook 2024: Resilience and Opportunities for Investors

A Timely Diversification Opportunity

As France navigates a period of political uncertainty, FCFA-denominated African bonds and stocks present an intriguing diversification opportunity for Euro earners and French investors. The combination of currency stability, growth potential, and yield advantages makes these assets worth considering as part of a well-balanced portfolio.

The ongoing French elections serve as a reminder of the importance of geographic diversification. While domestic political shifts may create volatility in French and European markets, FCFA investments offer exposure to a different set of economic drivers and growth trajectories. While these investments come with their own set of risks, they could serve as a valuable hedge against uncertainties. 

As always, investors should conduct thorough research and consider their risk tolerance before venturing into new markets. However, for those willing to look beyond traditional European investments, FCFA-denominated assets could provide both diversification benefits and potential long-term growth opportunities.

By exploring FCFA-denominated African bonds and stocks, investors can potentially safeguard their portfolios against domestic political turbulence while tapping into the dynamism of emerging African markets. In an era of global economic interconnectedness, looking beyond traditional European investments may prove to be a prudent strategy for long-term financial success.