Barclays Favors German Equities Over French Amid Rising Political and Fiscal Risks

Barclays has shifted its preference within European equities to Germany over France, pointing to a challenging combination of political and fiscal pressures weighing on French markets. In a Friday note, strategists warned that France is entering an "extended period of fiscal and political uncertainty" that is unlikely to resolve in the near term.

French Headwinds Mount

Analysts led by Emmanuel Makonga highlighted several concerns for France, including upcoming budget negotiations, credit rating reviews, and the looming 2027 presidential election. Polling currently favors candidates from the political extremes, with far-right leader Marine Le Pen in the lead, which adds "a layer of uncertainty to an already fragile fiscal backdrop," the strategists wrote.

The bank's report noted that France's fiscal situation is deteriorating, with the deficit expected to stay above 5% of GDP and public debt projected to exceed 120%. This risk is reflected in sovereign debt markets, where the spread between French OATs and German Bunds stands at 85 basis points. Barclays sees a potential for this spread to widen to 95-100 basis points if budget talks become contentious.

This fiscal pressure is also expected to impact corporate earnings. Barclays estimates that the confirmed extension of France’s temporary corporate tax surcharge could slash full-year 2027 EPS growth by approximately 8 percentage points, reducing the consensus forecast from 12.2% down to just 4.4%.

Germany's Improving Outlook

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In contrast, Barclays pointed to an improving economic picture in Germany. The bank cited strengthening activity momentum, supported by recent PMI and IFO data, as a key positive factor. Germany also possesses greater fiscal flexibility and "a stronger fiscal position than most EU/DM peers," according to the note.

While acknowledging risks such as potential winter gas price increases and a regional election, the strategists believe these are unlikely to derail the federal government's fiscal agenda. They concluded that with improving growth and "still undemanding valuations," German equities appear better positioned than their French counterparts.

Investor Positioning

Barclays acknowledged that French equities have already priced in a significant amount of negative news, evidenced by large capital outflows and valuations trading at a steep discount to European peers. However, the strategists concluded that "weak positioning alone is unlikely to trigger a sustained reversal while fiscal and political noise persists."