- Over Two thirds of CAC 40 members trade below December levels
- Hollande’s reforms seen slowly helping economic revival
Battered by delays to economic reforms and a lackluster recovery, French stocks have been left with at least one positive attribute: their valuations
More than two thirds of the benchmark CAC 40 Index’s members have fallen this year as investor concerns over domestic growth and the success of President Francois Hollande’s policies amplify wider anxiety about global growth, earnings and the efficacy of central bank measures. Down 3.7 percent in 2016, stocks in the euro-area’s second-largest economy are the cheapest in three years relative to their peers, and some fund managers are turning bullish.
With employment and tax changes on the way, plus an economy forecast to grow this year at its fastest pace since 2011, money will flow back to French stocks, according to Roland Kaloyan, chief equity strategist at Societe Generale SA. He expects the CAC 40 will end the year at 4,800, implying an 8.3 percent rally from Tuesday’s close -- more than projections for the Stoxx Europe 600 Index.
“The environment in France is changing, there are plenty of different factors helping French stocks,” said Paris-based Kaloyan, who sees the UEFA European Football Championship in June as one catalyst for investment and tourism. “Policies regarding corporate tax cuts and reduced government spending should help profitability and support competitiveness.”
Hollande is updating labor laws to make it easier to fire employees, and in 2014, he introduced corporate tax cuts to stimulate growth. The French economy expanded faster than expected in the first quarter, helped by an increase in consumer spending and the biggest jump in business investment in five years. Economists forecast growth of 1.4 percent this year.
Adecco SA, the world’s largest staffing company, said the recovery in France has prompted increased hiring in the building industry, and, although slow, it expects the improvement to accelerate in the second half of the year.
“Construction activity is picking up nicely in France, and the consumer is strong,” said Emmanuel Cau, a JPMorgan Chase & Co. equity strategist based in London. “Support is also coming from a weaker euro.”
The CAC 40 trades at about 14 times the estimated earnings of its members, the cheapest since 2013 versus the Stoxx 600. Sentiment among fund managers is warming -- the country’s stock market is the second most-favored in Europe, according to a Bank of America Merrill Lynch May survey. Just last month, only the U.K. was less popular.
But questions over the health of France’s economy remain. That’s leaving some investors unconvinced. At 48.3, a manufacturing gauge by Markit Economics remains below the level indicating expansion. The largest exchange-traded-fund tracking the market -- the Lyxor ETF CAC 40 -- is heading for a third consecutive month of outflows. In April, investors pulled 260 million euros ($291 million) from the fund, the most since 2012, according to data compiled by Bloomberg.
Still, there are signs of progress. Some of the nation’s biggest companies, including Danone and L’Oreal SA, reported better-than-forecast quarterly sales last month, while Total SA, which constitutes about 10 percent of the CAC 40, has prospered from its ability to adapt to low oil prices. BNP Paribas SA and Societe Generale SA posted surprise increases in first-quarter profit even as record-low interest rates squeeze European banks’ income.
To Kaloyan, though, it’s one step at a time
“The change is not a one-shot, and it won’t come overnight,” he said. “The reforms by the government are small but they’re all going in the same direction, which is to make France more business-friendly.”