Hollande No Hurdle to Stock Gains as French Outlook Sinks
The election of Socialist President Francois Hollande has proven to be no barrier to gains in French stocks, which are having the best year since 2009 even as profit estimates fall to an all-time low relative to Germany.
The CAC 40 (CAC) Index is up 16 percent since Hollande’s May 6 victory, while the DAXK, a German gauge that excludes dividends, increased 15 percent. Meanwhile, analysts forecast CAC 40 companies will post profit of 319.78 euros a share in the next year, the lowest projection since May 2010, data compiled by Bloomberg show. That compares with an estimated 679.29 euros for Germany’s benchmark DAX Index (DAX), near the highest estimate ever.
While brokers cut income forecasts, French stocks are rallying as the European Central Bank pledged unlimited debt purchases to bring down borrowing costs in the region’s weakest economies. Yves Maillot at Natixis Asset Management says the CAC 40 may rise further as it’s posted less than half the DAX’s gains since March 2009 and will benefit from overseas revenue at companies such as Clermont-Ferrand-based Michelin & Cie.
“The DAX has outperformed the CAC over the longer term so the CAC has room to catch up,” Maillot, who is based in Paris, said by phone. Natixis manages $375 billion. “French companies can extricate themselves from difficulties in France.”
The French equities index advanced 45 percent from the six- year low reached in March 9, 2009, while the DAX surged 107 percent, data compiled by Bloomberg show.
Investors are paying the most in 2 1/2 years for French stocks, even as the unemployment rate climbs to a 13-year high of 10.3 percent. Economists forecast next year’s growth will be the slowest since 2009 amid increased taxes on big companies and the rich.
The CAC 40 has risen 16 percent this year, the largest gain since 2009’s 22 percent rally. Lafarge SA (LG) and Societe Generale SA (GLE) have led the advance, driving the gauge’s valuation to 10.7 times estimated 2013 profits, the most expensive since January 2010, according to data compiled by Bloomberg. The DAX is trading at 10.9 times projected earnings, the data show.
For Jerome Forneris, who helps manage $8.5 billion at Banque Martin Maurel in Marseille, France’s efforts to tame its deficit are more important than the outlook for company earnings or the economy.
“What counts for investors is that France respects its commitments,” Forneris said in a phone interview. “German stocks are way ahead of French stocks so there is room for the CAC to continue gaining ground this month and into the first quarter. We’re still very low.”
French stocks are rising with government debt. The yield on the nation’s 10-year bonds has fallen to 1.99 percent from 3.72 percent in November 2011 even as Moody’s Investors Service and Standard & Poor’s stripped the nation of its top credit rating.
France sold 3.97 billion euros ($5.3 billion) in debt on Dec. 6, completing its 2012 issuance plan. The government auctioned 900 million euros of benchmark 15-year bonds at an average yield of 2.56 percent, a record low.
The CAC 40’s rally has been led by shares that were “massacred” last year and isn’t sustainable, according to Mathieu L’Hoir, a strategist at Axa Investment Managers in Paris. Since Hollande’s election, Societe Generale, France’s second-largest bank, surged 70 percent and Credit Agricole SA (ACA) jumped 72 percent. The lenders, which are based in or near Paris, tumbled at least 54 percent last year.
“The reason for the better performance is linked to the gains in French banks,” L’Hoir said in a Dec. 10 phone interview. “We expect the CAC to underperform the DAX. The earnings outlook is less favorable in France and valuations are a bit more attractive on the DAX.”
France’s economy is suffering as Hollande tries to shrink the budget deficit to 3 percent of gross domestic product in 2013 through about 27 billion euros in tax increases. The president, who described the financial industry as his “adversary” during the election campaign, became the first European leader to implement a tariff on financial transactions in August, with a 0.2 percent duty on share purchases.
Expansion will slow to 0.1 percent this year from 1.7 percent in 2011, according to economist forecasts compiled by Bloomberg. Growth will be 0.3 percent in 2013, the data show.
Srill, companies that get revenue from outside France are helping support this year’s rally for the CAC 40. Lafarge, the world’s biggest cement maker, has surged 78 percent this year for the best performance in the CAC 40. The Paris-based company makes about 75 percent of its revenue outside western Europe.
Michelin, which already gets almost 60 percent of sales outside Europe, said in October it plans to invest as much as 2.2 billion euros a year through 2015 to further expansion outside its home market. The world’s second-largest tiremaker has gained 56 percent this year, the biggest gain on record.
For Natixis’s Maillot, the presence of such global industry leaders in the CAC 40 suggests the index will continue to gain.
“In spite of the country’s difficulties, France has many companies that are grand champions and internationally recognized in their industries,” he said. “The market’s attitude shows a certain confidence in France.”
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