A Surprise Ballot Won't Topple French Stocks

By Sean Michael Cummings, analyst, True Wealth

French politics are sliding into disarray...

Earlier this month, President Emmanuel Macron of France suffered a stinging defeat in the European parliamentary elections when his party won only 15% of the popular vote.

Macron's rivals, the National Rally party, more than doubled that vote count at 32%.

In turn, Macron dissolved France's parliament and called for a snap parliamentary election – something no French president has done since 1997. The first round of voting will be held at the end of June.

This turmoil has injected huge volatility into the French stock market...

But I wouldn't bet against French stocks based on this political event. In fact, the growing uncertainty surrounding this market could be a major buying opportunity.

France is facing its "Brexit" moment...

In 2016, British voters shocked the world by electing to leave the European Union.

Britain's exit (or "Brexit") from the union was an outcome almost no one expected. British stocks reacted violently when the news came to light.

We can see this using the iShares MSCI United Kingdom Fund (EWU), which acts as a broad measure of U.K. stock performance. Take a look...

As you can see, the Brexit referendum briefly unsettled U.K. stocks... but within a few months, the market was climbing again.

The election of Donald Trump had a similar effect on the U.S. market...

Virtually no forecasters called for a Trump victory on their 2016 scorecard. And just like Brexit, the result took the market by surprise. Take a look...

Stocks dipped as the market digested the surprise. But the uptrend quickly resumed in the months that followed.

In short, political volatility is generally short-lived. And it can even provide a great opportunity to go long at a discount.

That brings us to the opportunity in French stocks today. France's index was jolted by National Rally's victory. We can see this with the iShares MSCI France Fund (EWQ), a basket of French stocks that reflects the broader French market.

EWQ fell around 3.8% in a single day on June 11. And it fell another 3.3% on June 14. Check it out...

You can see France's political turbulence reflected in the June sell-off.

But as we've learned from Brexit and the 2016 U.S. presidential election, politics rarely move the needle in the long term.

What's more, similar crashes have provided a great chance to buy French stocks.

To test this, I found every time EWQ had a sell-off of 3% or more in a single day. Then, I tested each of these signals to see what they meant for future returns. Take a look...

French stocks have been solid performers since 1996, generating about 4% a year. But that return jumps after the market takes a 3% single-day dive.

The signal returned 6% in a typical six-month period... and 14% in a year. That's more than triple the return of a buy-and-hold strategy.

In short, investors are underestimating the French market...

We'll see more drama in the weeks ahead as the snap election unfolds. But history shows this volatility is a buying opportunity in disguise. This corner of the market is worth your attention today.

Good investing,

Sean Michael Cummings

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