The French Are Crying `Vive La Bourse `Stewart Toy
Until recently, the Paris Bourse was as resistant to rising as a souffle in a drafty oven. But suddenly, the Bourse is lifting off amid hopes that France's new conservative regime will provide a tonic for the economy.
With Jacques Chirac succeeding Socialist Franois Mitterrand as President, the government is expected to cut corporate taxes and subsidize job creation. Chances are it will also let the franc soften against the German mark as part of a promised all-out war against 12.2% unemployment. Chirac's policies should boost dismal consumer spending and help exporters, which have suffered against France's weak-currency rivals in Italy, Britain, Spain, and the U.S.
The market--up 16% since March after going nowhere for five years--began its rise even before Chirac won the election. Now, Chirac's choice for Prime Minister strengthens the case for equities. On May 17--the day he took office--Chirac picked market favorite Alain Juppe, the outgoing Foreign Minister, to run his government. A moderate, Juppe favors European monetary union and a fair degree of fiscal prudence. He'll probably be joined by Alain Madelin, a strong free-marketer, as Finance Minister. Indeed, the new regime's determination to boost the economy could turn Paris into "the best big equity market in Europe," says Richard Davidson, London-based equity strategist at Morgan Stanley & Co.
Amid the recent rise in bullish sentiment, Lionel Rayon of Nomura Securities Co. sees the CAC index of 40 stocks (chart) rising 10% to 15% by yearend. Even with the market's gains since the election, he says, "lots of stocks are cheap." Among them, he believes, are producer Lafarge Coppee and electrical equipment maker Schneider, whose stock has been battered by a year-long Belgian probe of alleged corporate fraud. Rayon says that given projections of earnings increases for 1996, Schneider's strong prospects deserve more than a price-earnings ratio of 12 when another equipment maker, Legrand, commands 17.
Construction companies should win business if Juppe launches job-creating public works projects. Bouygues and Lyonnaise des Eaux-Dumez are good choices, believes Wolfhard Graetz, the chief of asset management at Bank J. Vontobel in Zurich. He also recommends Elf Aquitaine, "one of the world's cheapest oil stocks," which he expects to reap benefits from higher crude prices.
As Juppe seeks to juice up growth, consumer stocks should also shine. Household spending has been the economy's weak point; it should grow only 0.8% in the first half, government economists say, vs. their earlier forecast of 1.2%. But Joe Rooney of Lehman Brothers Inc. in London likes Renault and Michelin as plays on an expected rise in consumer confidence. At 2.5 times its 1995 cash flow, "Renault is exceptionally cheap," he says. Italy's Fiat, by contrast, commands a cash-flow multiple of 5. Other money managers are buying exporters including Peugeot, L'Oreal, and luxury giant LVMH Mot Hennessy Louis Vuitton.
Still, some warn against being swept away by euphoria. For one thing, the rise on the Bourse came about as it became clear that conservatives would end 14 years of Socialist rule by Mitterrand. "The big move has happened," says Alberto Morillo, portfolio manager at Scottish Widows Investment Management Ltd. in Edinburgh, who began buying in Paris last October. Moreover, Chirac's plans are vague. If he fails to quickly halt the growth of budget deficits, markets could attack the franc, force up interest rates, and stall economic growth. Labor pressure for higher wages is another worry.
MORE CUTS. But bulls are undeterred by such fears. They base much of their case on expectations that the Chirac regime will push the Bank of France to cut rates--a test of the central bank's recently won independence. The Bundesbank will help by cutting German rates again in two to three months, predicts Merrill Lynch & Co.'s chief European investment strategist, Mike Young.
A German rate cut would allow Bank of France Governor Jean-Claude Trichet to reduce French rates without triggering a run on the franc. Heavily indebted manufacturers would benefit from lower rates, as would banks and insurers, whose risky loan portfolios would strengthen. And lower rates could provide a firm footing for the entire economy and stock market. Young, for example, expects 30% profit growth at French companies this year, something that may be matched only in Germany.
It's vital that foreigners such as Young keep the faith. With 47% of its trading volume coming from abroad--vs. 14% in London--the Paris Bourse relies more heavily on foreign investment than any other large European exchange. For now, overseas traders, whose opinions count most, like what they see across the Channel. France's new rulers will be smart to keep them happy.
By Stewart Toy in Paris