A flatlining economy. The weakest profit margins in Europe. Stubbornly high labour costs despite the record unemployment that helped bring the hard-right National Front out on top in last week’s EU election. Why would anyone invest in French companies?
Despite those many reasons not to, however, some strategists have put on their contra-cyclical hats to say now is the time.
These include Societe Generale’s head of global asset allocation, Alain Bokobza, whose team in Paris called the CAC-40 index of blue-chip stocks higher in mid-January. Arguing that government policy can, finally, stimulate growth and that labour costs will ease, Bokobza is targeting 7,000 by the end of 2016, up 55 per cent from Tuesday’s closing index level of 4,504.12.
That target would, in fact, mean a gain of just 13 per cent over the pre-crash peak the CAC-40 hit seven years ago – a peak the German DAX has already surpassed by more than 20 per cent in a reflection of the many recent troubles of French corporations.
So far, not bad for SocGen’s forecast: the bourse index is up 5 per cent this year, outpacing Britain’s FTSE 100, up 1.4 per cent, as well as the DAX, which has risen 4 per cent.
Yet opinion is divided. Others have lately made similar forecasts for stocks to rise, but the SocGen call came only two months after Standard and Poor’s cut its credit rating on French sovereign debt due to doubts over President François Hollande’s ability to cut the budget deficit while delivering growth.
It came as Hollande, now the most unpopular French President in opinion poll history, launched a new plan to do exactly that.
The bet-on-France pitch rests on several assumptions: that Hollande’s cost-trimming, tax-easing pledges can boost corporate competitiveness and cut the budget deficit without hurting growth; that the President can overcome parliamentary resistance from fellow Socialists because his lawmakers fear for their seats if they trigger a parliamentary election by blocking them; and that French firms’ labour costs are set to fall.
Is all that realistic? Despite this year’s rise in the CAC-40, there is little to suggest fundamental economic growth is returning to France, that corporate fortunes are improving or that the nation’s finances are on a sounder footing.
The latest growth data showed French GDP was flat in the first quarter and had effectively not grown for nine months.
Total first-quarter revenue of CAC-40 companies was down 2 per cent. Data on gross corporate profit margins, based on tax receipts and compiled by the EU statistics office Eurostat, made France the worst performer in the eurozone in 2012, with a margin of just under 30 per cent for non-financial companies.
France’s own data for the fourth quarter of 2013, the latest available, showed those margins had declined further. The same went for gross return on capital employed before taxes in 2012 – at 12 per cent for France according to Eurostat, worse than both Italy and Spain – and well below a eurozone average of 19.
And in a survey by Ernst and Young last week, France lagged Britain and Germany in attracting foreign investment projects – though it did show a pick-up.
Government policy is in a tight spot. France keeps missing a eurozone target of 3 per cent of GDP for its public deficit. It stood at 4.2 per cent of GDP last year and the European Commission expects France to miss the target again next year.
Without growth or potentially growth-killing tax increases, only government spending cuts can bring the deficit down.
France keeps missing a eurozone target of 3 per cent of GDP for its public deficit
Cuts are unpopular – feeding fears the government will dodge the unpopular decisions required to deliver the €50 billion a year government cuts and fund the €30 billion of corporate tax relief they promised in January. And yet, more investment strategists are joining the bull camp. In April, UBS published an upbeat note after Hollande drafted in the pro-business Manuel Valls as Prime Minister.
In the same month, S&P affirmed its November rating and pronounced France’s outlook stable.
Then there are labour costs, a long-standing issue in French competitiveness. Here, Bokobza cites the importance of a freeze on civil service pay which is a part of the Hollande reforms. With the public sector such a major economic force, this amounts to a freeze on France’s wages benchmark, he argues.
French labour costs grew just 0.4 per cent in the third quarter of 2013 from a year earlier, against an EU average of 1 per cent and a 1.9 per cent increase in Germany. Non-wage labour costs actually fell 2.4 per cent in France, against a 0.3 per cent rise across the EU and a 1 per cent rise in Germany.
French unit labour costs nevertheless remain a key concern for rating agencies: “Despite generally weak export performance since the onset of the 2008-2009 global financial crisis, wage increases have outpaced productivity,” S&P said in April.