• The Gilets Jaunes (Yellow Vests) are a largely spontaneous protest movement that emerged in France, in October. With no declared political affiliation, they called for lower taxes and a higher level of social transfers and public services.
• The protests, in our view, will have a modest negative economic impact on growth, as a consequence of two opposite effects: a fiscal stimulus (with an impact on public deficit) and damage to business and investor confidence. We have just reduced our forecast on French real GDP growth from 1.5% to 1.4% for next year, while the deficit, depending on the measures, could be higher than 3%, before declining in 2020.
• We believe the protests will de-escalate but their consequence is that the French government may refrain from pushing further forward reforms in France, and may be in a weaker position to drive reforms at the European level.
• On the French Equity market, the possible boost in purchasing power could support the consumer sector, which was the hardest hit during the recent protests.
• Within a broader perspective, France just added to the political noise which is weighing on investor confidence in European assets, equity in particular. Political-driven volatility will be a feature of the next year, at least until the next Parliamentary elections occur in May. However, we believe the recent market correction incorporates a too-pessimistic scenario and pockets of value are opening-up for profitable, not over-indebted companies, currently trading at discounted prices, due to political risk.
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