Terror Aside, Economy Hopes Put French Stocks Among '15 Best

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  • CAC 40 Index rallies most in six weeks just days after attacks
  • Airbus, Peugeot and Renault are up more than 50% this year

Faith in France’s economic recovery helped make its shares some of traders’ favorites in the developed world this year, outweighing even terrorism woes.

Up 14 percent in 2015 and showing resolve with a 2.8 percent gain yesterday, the rally in the benchmark CAC 40 Index trounces even German equities. Industries such as cars, jets and banks are starting to boom again. With the economy returning to growth in the third quarter and the likelihood of more European Central Bank stimulus, bulls like Julius Baer Group Ltd.’s Christian Gattiker see reasons to buy.

“The stage is set for a long-term outperformance of French equities,” says Gattiker, head of research at Julius Baer in Zurich. His firm manages 284 billion Swiss francs ($280 billion). “The prospects for the Renaults and Peugeots has improved dramatically. The whole thing reminds me of Germany 10 or 12 years ago.”

That would be good news for French stocks, whose CAC 40 climbed only 12 percent in a decade, compared with the 68 percent gain in the German Stock Price Index, a gauge that, like the French measure, doesn’t include company dividends. This year, for the first time since 2011, the CAC 40 is outperforming its peer.

CAC 40 outperforms its German peer

Forecasters see French gross domestic product climbing 1.1 percent in 2015, the most since 2011. Even though that’s less than for the euro area, Finance Minister Michel Sapin said accelerating corporate investment bodes well for growth next year.

The improvements are seen across industries. A 26th straight month of rising car sales has helped push PSA Peugeot Citroen and Renault SA up more than 50 percent from January through yesterday, and booming demand for Airbus Group SE’s A320 jets sent its shares rallying 60 percent. Societe Generale SA is among the top performing banks stocks in Europe, up 26 percent.

“If you look at the top performing stocks on the CAC 40, it’s basically a play on the European recovery,” said Ralf Zimmermann, a strategist at Bankhaus Lampe in Dusseldorf. “A couple of good companies where operations are running well, plus exposure to the European business cycle is probably the reason behind it.”

France is pushing through reforms to help the economic rebound. Among them, it’s made it easier for companies to fire workers and allowed more shops to open on Sundays. For Old Mutual Global Investors’ Barthelemy Debray, that’s not enough. Labor-market flexibility remains one of the issues, according to him.

Not Enough

“We have not seen enough reforms in France,” the London-based fund manager said. Old Mutual oversees 20 billion pounds ($30 billion). “If you think some of the outperformance of the CAC 40 was led by the market getting more confident about reforms in France and about the future, then I think the market will be disappointed.”

Julius Baer’s Gattiker says many of the changes will help earnings growth, which will, in turn, boost shares further.

“It’s one of our preferred markets overall in the context of Europe,” he said. “France has everything in place to outperform other European indexes, in particular Germany in the three- to five-year time horizon.”