CNBC Comment: Investors are warming to sickly France
MARKET darlings have been feeling the pain of rejection. Now safer dividend stocks are the new best thing, but curiously there is another contender for reallocating funds – France. The benchmark CAC 40 Index, which delivered double the pace of growth of the Dow Jones Industrial Average in 2013, with returns of 15 per cent, is now on course for a repeat performance according to some fund managers
Societe Generale holds one of the most bullish forecasts. Its head of global allocation Alain Bokobza is targeting 5,000 for the CAC this year (from yesterday’s close at 4,385), and 7,000 by 2016, bringing total returns from current levels to 60 per cent. Even more curious is the rationale. Bokobza cites Francois Hollande’s policies as the sweetener – a boost to French competitiveness through corporate tax cuts; a reduction of red tape to encourage entrepreneurs and employment; and the government’s ability to redirect French pension savings into productive assets.
“Historically, the S&P 500 is at an all time high, the Dax and the FTSE Total Return have reached all time highs. But the French CAC 40 was at 6,900 back in September 2000, almost 15 years ago, so this is one of the lagging indexes globally. French economic policy was lagging in terms of restructuring. Now that is done, so it is time to be optimistic about French equities,” said Bokobza.
Others give government policies less credence, but believe it’s time for a revival trade. HSBC has upgraded French equities. Paul Sullivan, its head of European equity strategy, feels too many investors have negative top-down views, and warns that short France is a dangerous consensus trade. He points to growth, which hasn’t collapsed, and earnings, which have stabilised.
“The earnings numbers are starting to bottom out and the momentum is less negative… When those short positions are removed we think the market will outperform,” said Sullivan
Beat Wittmann of TCMG is telling clients the French market will be a consistent performer, with returns on average of 15 per cent both this year and next. “People judge it by the macro assessment, and that is terrible especially with negative headlines. But that’s not the driver behind the French stock market. It is the recovery of the Eurozone, relative change in politics, and better earnings,” said Wittmann.
Few believe Hollande is a full turncoat socialist, despite more market-friendly policies and the recent appointment of populist Manuel Valls as Prime Minister. Economists still fear it is a long road to recovery, and argue that France remains the “sick man of Europe”. But the altered view by investment houses on French stocks suggests that Hollande may be starting to win over sentiment.
Karen Tso is an anchor for Squawk Box Europe on CNBC. @cnbckaren