If financial markets are a guide, France is facing a perilous period of turbulence and uncertainty as the presidential election nears — but the underlying economy is telling a different story.
While France’s bond yields have spiked and its stocks have trailed the rest of the eurozone, as investors run scared of political risk, the nation’s economic prospects are actually looking up.
French business confidence, consumer confidence and job creation are surging, while earnings expectations for big French companies are also improving.
Whoever wins May’s election — whether it be conservative Francois Fillon, National Front leader Marine Le Pen or centrist Emmanuel Macron — will start their five-year term with hiring at a decade high and the sluggish economy finally strengthening.
Ironically, they may have French President Francois Hollande to thank, as his business-friendly reforms could be bearing fruit at last — too late for the man whose failure to turn the economy around helped make him the most unpopular president in modern French history and pushed him toward the political exit.
For some large international investors, any risk aversion to France offers buying opportunities for stocks underpinned by robust fundamentals.
“When markets apply a blanket negative response to an issue like France, we can come in and benefit our shareholders,” said Steve Caruthers, an investment specialist in Los Angeles with Capital Group Companies, which manages US$1.4 trillion.
“We have lots of companies within France that we have high conviction in today. They offer attractive valuations, certainly, compared to a lot of their US competitors,” said Caruthers, whose firm holds stakes in Airbus, spirits maker Pernod Ricard and luxury group LVMH.
POLITICAL RISK
Other bond and stock market investors fear the global populist revolt that propelled Brexit and US President Donald Trump could sweep Le Pen to power.
A scandal over Fillon’s payments of state money to family members has left the election with no clear favorite. Though polls put Le Pen in the lead to win the April 23 first round of the two-round election, either Fillon or Macron are seen easily beating her in a May 7 runoff.
She has, however, narrowed the gap with her rivals in second-round voting intention surveys, a development which last week drove the premium that investors demand to hold French over German debt to highs not seen since late 2012.
“Le Pen’s campaign is gaining traction and we can’t ignore that, even though her victory is hardly anybody’s main scenario,” said Hideo Shimomura, chief fund manager at Tokyo-based Mitsubishi UFJ Kokusai Asset Management.
Japanese investors, traditionally big buyers of French debt, have been net sellers in recent months, according to official data.
Some funds say this is more about Japanese investors staying home as long-term yields rise there.
Shimomura said that many Japanese institutional investors could also not buy ahead of their book-closing at the end of this month.
Meanwhile, French bond futures — used to hedge risk and trade market swings — have seen record interest this month, while some equity investors have been looking for hedges against volatility around the election in put and call options.
French stocks have also become the least preferred by portfolio managers in Europe, according to Bank of America Merrill Lynch’s monthly survey.
France’s CAC-40 blue-chip index is largely flat since the start of this year, while the STOXX Europe index of eurozone shares has gained 2 percent.
This is despite improving earnings expectations for French companies; the number of analysts upgrading their earnings expectations for the country’s firms is now higher than the number downgrading for the first time since the middle of 2015, according to Thomson Reuters I/B/E/S.
Morgan Stanley put the probability of a Le Pen presidency at no more than 15 percent, in a research note on Thursday last week, saying markets were overestimating the likelihood.
While markets stress about the election, business leaders appear largely unfazed, judging by the latest monthly purchasing managers surveys, which came in at a near six-year high.
REAL ECONOMY
The surveys have exceeded expectations and, at least for the service sector, have surpassed levels seen in the stronger German economy on firming domestic demand.
Even the long-struggling industrial sector is picking up, with morale rising more than expected this month, according to a monthly survey from France’s National Institute of Statistics and Economic Studies (INSEE).
Official data this month also showed the economy created jobs in the fourth quarter at the fastest pace in a decade thanks to the services sector, which is by far the biggest sector in France.
The trend looks set to continue with the French Ministry of Labor, Family and Social Affairs reporting job vacancies running at a five-year high and employers planning on hiring a record 216,500 managerial level workers this year, according to the APEC association that represents them.
The recovering economy could be down to Hollande’s reforms over the past five years, which included a payroll tax credit scheme to boost companies’ profitability and looser labor market rules to encourage hiring, and are likely to benefit his successor.
“Whatever party is elected, these measures will keep having a positive impact on [economic] activity,” economist Arthur Jurus at Switzerland’s Mirabaud Asset Management said.
Additional reporting by Vikram Subhedar, Trevor Hunnicutt, Chuck Mikolajczak and Hideyuki Sano
Could Asia be on the verge of a new wave of nuclear proliferation? A look back at the early history of the North Atlantic Treaty Organization (NATO), which recently celebrated its 75th anniversary, illuminates some reasons for concern in the Indo-Pacific today. US Secretary of Defense Lloyd Austin recently described NATO as “the most powerful and successful alliance in history,” but the organization’s early years were not without challenges. At its inception, the signing of the North Atlantic Treaty marked a sea change in American strategic thinking. The United States had been intent on withdrawing from Europe in the years following
My wife and I spent the week in the interior of Taiwan where Shuyuan spent her childhood. In that town there is a street that functions as an open farmer’s market. Walk along that street, as Shuyuan did yesterday, and it is next to impossible to come home empty-handed. Some mangoes that looked vaguely like others we had seen around here ended up on our table. Shuyuan told how she had bought them from a little old farmer woman from the countryside who said the mangoes were from a very old tree she had on her property. The big surprise
The issue of China’s overcapacity has drawn greater global attention recently, with US Secretary of the Treasury Janet Yellen urging Beijing to address its excess production in key industries during her visit to China last week. Meanwhile in Brussels, European Commission President Ursula von der Leyen last week said that Europe must have a tough talk with China on its perceived overcapacity and unfair trade practices. The remarks by Yellen and Von der Leyen come as China’s economy is undergoing a painful transition. Beijing is trying to steer the world’s second-largest economy out of a COVID-19 slump, the property crisis and
As former president Ma Ying-jeou (馬英九) wrapped up his visit to the People’s Republic of China, he received his share of attention. Certainly, the trip must be seen within the full context of Ma’s life, that is, his eight-year presidency, the Sunflower movement and his failed Economic Cooperation Framework Agreement, as well as his eight years as Taipei mayor with its posturing, accusations of money laundering, and ups and downs. Through all that, basic questions stand out: “What drives Ma? What is his end game?” Having observed and commented on Ma for decades, it is all ironically reminiscent of former US president Harry