The Yellow Vests Movement is a largely spontaneous protest movement that emerged in France. They did not declare political affiliation, and they called for lower tax and more public services.
The implications on France economy
The protests will heavily weigh on Q4 activities, especially retail sector. Most commercial and luxury brands had to close their stores for the 5th Saturday. Around 15% traffic will decrease because of the Yellow Vests Movement.
However, the pro-business reform agenda of the Macron may have to be toned down in the next year. Last week, the president announced a number of tax cuts, rising a concern about fiscal deficit. As a result, based on Bloomberg data, French GDP can reduce to 1.4% due to Yellow Vest Movement.
Reform momentum fade
The concessions of Macron on French finance will have a more significant effect on the Eurozone. Based on the Amundi estimation, the French public deficit can be above 3% of GDP next year, after the measure just to be announced. France’s fiscal deficit rate will be much higher than Italy. It is more difficult for France to support the EU’s plan to rectify the fiscal deficit and oppose Italy’s increase in fiscal deficits and government spending.
Euro Area countries fiscal deficit as of GDP
Data Source: Bloomberg
As we are closer to the 2019 European parliamentary election, the increasing momentum of non-mainstream parties, like Yellow Vests Movement in France, make investor feel nervous. Since 2017, France had been relative away from politic chaos, compared to the Germany, Spain and Italy. Due to the rising uncertainty of reform momentum, French government have less strength to push for further reforms in the Eurozone.
Volatile European outlook
Financial markets are influenced by the headline of political events, which has become much more this year. We believe the situation will continue, especially until the European parliamentary election in May. Brexit is one of the key concerns in European. Moreover, the budget between Italy and EU is still ongoing. European equity market will still face a volatile environment.
European equity valuation become more attractive under geopolitical pressure. The relative valuation metric between European and US dropped below one standard deviation of 20 years average level. But we believe investors should be patient until all political chaos passed.