In 2025, French equities, as tracked by the iShares MSCI France ETF (EWQ), have significantly outperformed the S&P 500, demonstrating remarkable resilience amidst domestic political and budgetary concerns. This impressive performance is largely underpinned by a robust euro, a trend experts believe will continue into the following year, fueled by differing monetary policies between the European Central Bank and the U.S. Federal Reserve. Coupled with attractive current valuations, this suggests a promising outlook for French stocks to maintain their upward trajectory.
The strong performance of the iShares MSCI France ETF in 2025, achieving a gain of approximately 29% against the S&P 500's roughly 18% increase, highlights the growing investor confidence in the French market. A key driver behind this outperformance is the strengthening euro against the US dollar. With the European Central Bank (ECB) maintaining its current policy stance and the Federal Reserve widely expected to implement further rate cuts, the EUR/USD exchange rate is projected to see incremental appreciation in 2026. This currency strength enhances the returns for international investors holding euro-denominated assets, making French stocks particularly appealing.
Beyond currency dynamics, the valuation of French equities presents another compelling argument for continued growth. Compared to their global counterparts, French stocks currently trade at more attractive multiples, offering a potential value play for discerning investors. This combination of a strengthening currency and favorable valuations creates a powerful tailwind for the iShares MSCI France ETF. However, investors must also acknowledge certain inherent risks. The ETF's expense ratio of 0.5% is notable, especially given its significant concentration in the top ten holdings. This concentration can lead to higher volatility and idiosyncratic risks associated with specific companies. Furthermore, the ETF's overweight position in cyclical sectors could expose it to greater sensitivity to economic fluctuations, particularly in the lead-up to the 2027 presidential elections in France, which may bring about periods of political and economic uncertainty.
Despite the prevailing political instability and budgetary challenges within France, the market has shown a remarkable ability to generate strong returns. The anticipated continuation of the euro's strength, driven by divergent central bank policies, forms a solid foundation for French equities. As the ECB holds steady and the Fed moves towards rate reductions, the allure of French assets for international capital is likely to intensify. This macroeconomic backdrop, combined with appealing valuations, positions the iShares MSCI France ETF for potential continued outperformance.
Considering the strong market performance observed throughout 2025 and the macroeconomic tailwinds projected for 2026, French equities offer a compelling investment proposition. While the concentration within the EWQ ETF and the domestic political landscape require careful monitoring, the overall picture suggests that the French market remains an attractive destination for capital seeking growth. Investors looking for opportunities in developed European markets may find French stocks, particularly through the EWQ ETF, to be a valuable addition to their portfolios, provided they are mindful of the associated risks and cost structure.