Hollande’s Finance-Enemy Stance Gets Gallic Shrug as ECB Boosts French CAC
Investors in French stocks are greeting the nation’s presidential election with a Gallic shrug.
The CAC 40 Index (CAC) has risen about 8 percent this year as at least part of the 1 trillion euros ($1.3 trillion) in loans that the European Central Bank has provided to banks since December has trickled into the region’s equity markets.
Investors in France haven’t been spooked by pronouncements from election frontrunner Francois Hollande that his “adversary is finance.” They’ve also ignored threats of a transaction tax backed by Hollande and President Nicolas Sarkozy. The rally may be sustained by the ECB’s support for banks regardless of the ballot’s outcome, said Jacques Porta, a fund manager who helps oversee about $400 million at Ofi Patrimoine.
“Overall, it’s the ECB’s actions that will drive the market,” said Paris-based Porta. “A Sarkozy win would be rather positive for the market, while if Hollande wins, there will be a short-term perturbation for stocks.”
Hollande, the Socialist candidate, would get 58 percent of the vote in a second-round runoff, against 42 percent for Sarkozy, according to an LH2 poll published March 4. The first round of elections will be held April 22, with the top two candidates facing off May 6.
“The markets won’t panic over a victory by one of the two main parties,” said Matthieu Giuliani, who helps manage $4 billion at Paris-based Banque Palatine SA. “Neither would take decisions that are too strong, like more extreme parties.”
Hollande, who has pledged to force banks to split their investment banking and consumer units, limit bonuses and increase corporate taxes, would become the first Socialist President since Francois Mitterrand’s second term ended in 1995.
He told a crowd of more than 10,000 supporters during his first campaign rally on Jan. 22 that he sees finance as a “rival without a name, without a face.” He criticized “the power of money,” pledging to ban French banks from operating offshore and to cap executive pay.
“Francois Hollande could have a negative impact on markets, but not as bad as in 1981,” when Mitterrand was elected, Pierre-Olivier Beffy, chief economist at Exane BNP Paribas in London, wrote in a note today. “Hollande is more centrist than Mitterrand.”
The French market, measured by a general index in 1981, tumbled 33 percent immediately after Mitterrand’s election, according to a report by David Le Bris at Universite Paris- Sorbonne et Orleans. The index slid 17.6 percent that year, according to NYSE Euronext.
Although the current rally in French stocks may be extended by the ECB funding, a victory for Hollande may hurt bank shares, with investors saying his proposal to separate investment and retail banking raises concerns.
“There won’t be a cataclysm if Hollande is elected,” said Fabrice Seiman, co-chief executive officer of Lutetia Capital in Paris, which oversees $100 million. “That said, there certainly will be sectors that will suffer, like banks for example.”
BNP Paribas SA and Societe Generale SA (GLE), France’s two biggest banks, have climbed about 17 percent and 38 percent respectively in Paris trading this year.
Hollande proposes cutting the share of nuclear power in France’s energy supply to 50 percent in 2025 from about 75 percent, a measure Sarkozy predicts will raise electricity prices and cost thousands of jobs.
The Socialist candidate wants to boost levies on large companies and impose a 75 percent income tax on annual earnings of more than 1 million euros. He wants to renegotiate the Dec. 9 European fiscal treaty, advocated by Germany’s Angela Merkel.
“The unknown is Hollande,” said Ofi’s Porta. “Hollande is against the rule concerning budgetary discipline. Hollande’s relationship with Merkel is terrible. That’s negative. That can reinforce uncertainties. Europe needs more stability.”
Electricite de France SA, Europe’s biggest power generator, which owns France’s 58 nuclear plants, may be hurt by Hollande’s plan to curb such energy.
Utilities such as phone operator France Telecom (FTE) SA and GDF Suez SA, a supplier of natural gas, that pay large dividends also may take a hit, said David Finch, head of cross-sector research at Exane BNP Paribas in Paris.
“For a number of big French companies, like France Telecom or GDF Suez, it’s going to encourage smaller dividends, which won’t be great for share prices,” he said.
The benchmark CAC 40 index was 2.5 percent lower at 3399.55 as of 3:33 p.m. in Paris.
Sarkozy’s presidency has been marked by global economic crises almost from the start. Since he took office on May 16, 2007, the CAC 40 has slumped 43 percent. The French economy slowed to 1.6 percent in 2011 from 2.3 percent in 2007, and jobless claims jumped by 5.6 percent to 2.87 million, the highest since September 1999. Standard & Poor’s stripped France of its top debt rating on Jan. 13.
In an effort to overcome the global economic headwinds, Sarkozy’s Union for a Popular Movement watered down the 35-hour workweek instituted by the Socialist government of Prime Minister Lionel Jospin, limited taxes on France’s wealthiest and cut business rates to encourage investment.
He pushed through a two-year increase in the retirement age to 62 to reduce the government’s budget deficit, which the European Union forecasts will be 5.9 percent of gross domestic product this year.
Sarkozy announced an increase in France’s value-added-tax last month to compensate for reductions in payroll charges. Hollande said he would reverse Sarkozy’s plan.
“Whatever government is elected, it won’t have a lot of room to maneuver to do things much differently,” said Frederic Plisson, a fund manager at Financiere de l’Echiquier in Paris, which oversees $6.6 billion. “We’ll all be taxed a lot more.”
France is faring better than some euro-region neighbors. The economy grew at an annual rate of 1.4 percent in the fourth quarter, twice the 0.7 percent for the euro area, according to government data. The French government expects the economy to expand 0.5 percent this year.
The CAC 40’s rally this year has outperformed the 6.5 percent increase in the Stoxx Europe 600 Index (SXXP) of the region’s biggest companies as ECB President Mario Draghi offered unlimited three-year loans to European banks.
The Frankfurt-based central bank allocated 529.5 billion euros in three-year loans to 800 banks on Feb. 29, topping the 489 billion euros handed out to 523 lenders in the first such operation in December.
U.S. reports from employment to manufacturing have beaten economists’ forecasts since the second half of 2011, spurring optimism that the world’s biggest economy is strong enough to drive global growth.
Investors can safely ignore Hollande’s “populist rhetoric,” said Exane BNP’s Finch.
“It’s to appeal to people’s dislike of bankers being paid bonuses,” he said. “The ECB action is infinitely more important for stocks.”
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