Options traders are betting declines in French stocks aren’t over as concern grows that President Francois Hollande will fail to revive the economy.
Bearish contracts on the benchmark CAC 40 Index (CAC) cost the most since April 2013 relative to those on the Euro Stoxx 50 Index, data compiled by Bloomberg show. Puts protecting against a 3.7 percent decline in the gauge are the most owned. French shares have fallen 6.2 percent to their lowest level since March from their high last month, compared with the 4.6 percent decline for the euro-area index.
France’s economic recovery has fallen behind the euro area for the past three quarters and executives at the country’s biggest companies blame inconsistent policies for undermining confidence. Hollande, who raised taxes after coming to power two years ago, now faces opposition within his own party to reducing government spending in order to fund corporate and payroll tax cuts aimed at boosting employment flexibility.
“France’s economic growth has been disappointing, and the government performance has been lackluster,” said Stewart Richardson, who helps oversee about $100 million as chief investment officer at RMG Wealth Management LLP in London. “The lack of structural reforms and lack of popular support for the government is causing concern among investors. This concern is more reflected in equity markets.”
France’s least popular president since its constitution was formed in 1958 has pledged to cut public spending by 50 billion euros ($68 billion) in the next three years and halt tax increases to boost confidence and investment.
Still, the scale of disillusionment with his government was underlined in May, when the anti-euro, anti-immigration National Front party won its first-ever victory in nationwide voting for the European Parliament. At the same time, French jobless claims rose to a record in May, exceeding analysts’ forecasts, according to a Labor Ministry report.
Executives at companies including oil producer Total SA, tiremaker Michelin & Cie. (ML) and plane builder Airbus Group NV this month expressed concern that Hollande won’t deliver on promised cuts in business charges and public spending.
The International Monetary Fund lowered its 2014 growth forecast last week for France to 0.7 percent from a previously estimated 1 percent. It expects Germany’s economy to expand at least 1.7 percent and the U.K. to grow 2.9 percent. France’s economy stagnated in the first quarter of 2014, compared with a 0.2 percent expansion for the euro area, according to Eurostat.
A composite purchasing managers’ index of manufacturing and services in France fell below 50, the dividing line between expansion and contraction, in the past two months, Markit Economics data showed. The Bank of France’s business sentiment indicator has also declined for the past three months.
The CAC 40 has climbed 1.5 percent this year through yesterday, compared with gains of 2.7 percent for Germany’s DAX Index, 10 percent for Italy’s FTSE MIB Index and 8.4 percent for the IBEX 35 Index, the Spanish benchmark equity gauge.
A decline in BNP Paribas SA, which has the third-biggest weighting on the French index, has also contributed to a lag in the gauge’s performance relative to peers, according to RMG’s Richardson. BNP has tumbled 16 percent this year as it pleaded guilty to charges of violating U.S. sanctions and agreed to pay a fine of $8.97 billion.
Implied volatility, used to gauge the cost of options, for CAC 40 contracts climbed 3.8 percent since the end of May, compared with a 6.7 percent drop in the measure for the Euro Stoxx 50, according to one-month data compiled by Bloomberg. Options on the French gauge were the most expensive in more than a year relative to those on the euro-area index on July 3.
Investors’ concern over France’s economy is already priced into stocks, according to Andrew Garthwaite, a global equity strategist at Credit Suisse Group AG.
“If you look at the underperformance of the CAC 40 relative to the Euro Stoxx 50, the unexpected weakness of the PMI data is fully reflected,” the strategist said by phone from London. “The PMI should pick up. It does appear as if France is making some attempt at economic and corporate restructuring.”
The CAC 40 Volatility Index, a gauge of expectations for stock swings, rose 9.4 percent to 15.8 at 11:30 a.m. in Paris, extending this week’s advance to 31 percent. The VStoxx Index for euro-area equities added 11 percent to 16.69.
Among the 10 most-owned CAC 40 options, nine were bearish. September 4,200 puts had the largest open interest, followed by contracts hedging against a 17 percent slump by December, data compiled by Bloomberg show.
“There’s very limited labor market flexibility in France,” said Gerard Lane, a strategist at Shore Capital Group Ltd. in Liverpool, England. “The economic environment is not one that enables companies to grow their profits aggressively.”
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