Political turmoil in France has caused the country to lose its position as Europe's largest stock market, a crown it snatched from Britain less than two years ago.

French President Emmanuel Macron's unexpected announcement of an early election has triggered a stock market rout that wiped out about $258 billion from the value of French companies last week. Shares of Societe Generale, BNP Paribas and Credit Agricole, all big holders of French government bonds, fell more than 10%.

According to data compiled by foreign media, the total market value of the French stock market is currently about $3.13 trillion, slightly lower than the UK's $3.18 trillion. France's CAC 40 index wiped out all its gains in 2024, showing a sharp reversal from its all-time high set a month ago.

“We are in a three- to four-week period of uncertainty and unfortunately the market could become more volatile,” said Alberto Tocchio, portfolio manager at Kairos Partners.

French stock market no longer Europe's largest

Meanwhile, a host of factors, including improving global economic growth and increased merger and acquisition activity, have made British stocks popular again among investors. Although Britain is also preparing for its own general election, polls show that the opposition Labour Party has a large lead, making the election result look more stable.

Ulrich Urbahn, head of multi-asset strategy and research at Berenberg, said: "We like UK stocks for valuation reasons. At the same time, we also see them as a diversification tool for portfolios given their attractive industry profile." Urbahn stressed that "on top of that, political uncertainty seems to be higher elsewhere, at least for now."

Britain's FTSE 100 index has hit record highs this year, driven by export-reliant stocks such as Shell and Unilever. It has fared much better than the Euro Stoxx 50 index over the past three months, with jet engine makers among the biggest gainers.

Globally, the UK stock market is now the sixth largest.

In France, market strategists are not convinced that investors will flock back to stocks amid uncertainty related to public finances and policies. In addition to banks, toll road operators Vinci SA and Eiffage SA fell on concerns that highways could be renationalized if Macron's party loses power.

“Given the unusual political conundrum and the high risk between now and the election, we see no reason to rush to buy the dip,” Barclays strategist Emmanuel Cau said in a June 12 strategy note. Voting will take place on June 30 and July 7.

Investors are suddenly pricing more risk into French stocks

Of course, investors also have reason to be cautious about the U.K. The July 4 election will mark the biggest political shake-up since Brexit, with the new government having limited fiscal space and facing scrutiny from bond market watchdogs.

British stocks have also been hurt by companies choosing to list in Europe or the United States, partly due to pressure from activist investors seeking better valuations.

Article forwarded from: Jinshi Data