What French equities to buy following reforms

Kicking and screaming, the French government has finally begun to introduce some reforms towards a less regulated economy – although all the while trying to look as if this isn’t what it is doing.

For the first time in nearly 10 years, the French government risked a no-confidence vote – forcing legislation through parliament by telling MPs to vote down the government if they don’t approve it – to pass the so-called “Macron law.”

Named after economy minister Emmanuel Macron, the law does not look too controversial to an outsider.

Its main provisions extend opening hours for some shops on Sundays, make it easier for young people with law qualifications to get jobs by cutting the number of other regulatory hurdles they must overcome, speed up labour tribunal cases for dismissals, and open up long-distance bus routes to more competition.

Such openness is normal in many other European countries, but for France it means that the government becomes deeply unpopular with those who stand to gain from the regulatory barriers to new entrants into those particular business areas.

On Friday, the European Commission will issue an opinion on France’s reform plans and on its intention to set a higher budget deficit, at above 4% of GDP for this year.

Analysts at Societe Generale warn that the EU’s executive arm may ask France for further efforts, both in terms of reforms and in terms of cutting the budget deficit, but nevertheless they believe the country’s reforms are a tailwind for its equities.

A recent investor survey showed German stocks were investors’ favourites in Europe but a look at the chart shows French equities have actually outperformed the German ones.

French equities vs German stocks

French equities outperforming German ones. Source: Societe Generale

France’s CAC40 stock market index advanced by 13% year to date to 4,833, outperforming most of the other indices in Europe.

The Societe Generale analysts target a 5,000 level for the end of this year, but say this is a “cautious approach.”

Their target for the end of 2016 is 6,000 and they expect the index to gain another 1,000 points by the end of 2017.

Besides the domestic reforms, the European Central Bank’s decision to start buying government bonds from next month is an important tailwind, as it weakens the euro and helps exporters.

The analysts calculate that French stocks will benefit the most, because every 10% weakening of the euro would boost French companies earnings by around 9%, more than the 7% boost on average for eurozone companies’ earnings or the 6% likely to be enjoyed by German firms’ financial results.

Certain stocks are likely to outperform the index when the French manufacturing PMI rises, as they have a lot of production based in France but export their goods and services around the world.

The Societe Generale analysts have compiled a list of 16 stocks that are likely to outperform the index.

Benefiting from the consumer’s revival due to lower oil prices, the most likely companies to outperform are: Accor, Renault, Peugeot, TF1, Casino, Carrefour and Iliad.

In the industry and services field, they mention Air France, Eiffage, Saint-Gobain, Vinci, Thales and Veolia Environnement, while in financials BNP Paribas, Credit Agricole and Icade are the best placed to offer exposure to the French recovery story.

— The author, Antonia Oprita, had no positions in any of the securities mentioned here at the time of publication. This article is for information only and should not be seen as an investment recommendation.


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