Paris loses crown as Europe's biggest stock market to London

France's political upheaval has led the country to lose its spot as Europe's biggest equity market, less than two years after stealing that crown from the UK.

President Emmanuel Macron's shock announcement of a snap election sparked a rout that wiped off about $258 billion from the market capitalization of French firms last week. Shares of banks Societe Generale SA, BNP Paribas SA and Credit Agricole SA — all big holders of government debt — lost more than 10% each.

Stocks in the country are now collectively worth about $3.13 trillion, narrowly losing out to the UK at $3.18 trillion, according to data compiled by Bloomberg. The CAC 40 Index has erased all its gains for 2024 — a sharp reversal from scaling record highs a month ago.

"We are in a period where there are no certainties for three-to-four weeks and the market could unfortunately become more unstable," said Alberto Tocchio, a portfolio manager at Kairos Partners.

At the same time, a confluence of factors including improving global growth and a pickup in merger activity has made UK stocks popular with investors again. Although the country is preparing for its own general election, the outcome is seen as being more stable with the opposition Labour party leading in polls by a wide margin.

"We like UK stocks for valuation reasons but also as a portfolio diversifier given their attractive sector profile," said Ulrich Urbahn, head of multi-asset strategy and research at Berenberg. "On top of that, the political uncertainty seems to be higher elsewhere, at least for the moment."

The FTSE 100 Index has hit all-time highs this year, fueled by export-reliant stocks such as Shell Plc and Unilever Plc. It has outperformed the Euro Stoxx 50 index by far in the past three months, with jet-engine maker Rolls-Royce Holdings Plc among the biggest gainers.

On a global scale, the UK now ranks as the sixth-biggest stock market.

In France, market strategists aren't convinced about flocking back into equities yet due to uncertainty related to public finances and policy. Besides banks, toll-road operators Vinci SA and Eiffage SA have slumped on concern that highways could be re-nationalized if Macron's party loses power.

The news comes at a time when France's heavyweight luxury stocks were already under pressure from an uneven recovery in China.

"Given the unusual political conundrum currently and high headline risk between now and the election, we see no reason to rush to buy the dip," Barclays Plc strategist Emmanuel Cau said in a 12 June strategy note. The two-round vote occurs 30 June and 7 July. 

To be sure, investors see some reasons to remain cautious on the UK, too. The 4 July election will mark the biggest political shakeup since Brexit, and the new government will have limited fiscal headroom and face scrutiny from bond vigilantes.

The country's stock market is also reeling from companies choosing to list either in Europe or in the US, partly driven by pressure from activist investors seeking better valuations.