Can Macron deliver for investors?

    27 May 2017

    An intelligent and driven centrist, young yet politically wise beyond his years — and with a track-record in business too — triumphs in a hard-fought presidential election and is handed the keys to power. His populist opponent, battle-hardened but distrusted by too many nervous voters, is soundly thumped, winning barely a third of the vote and prevailing in just two of the country’s 97 administrative regions.

    The winner advocates a mix of stimulus and tax cuts. He pledges to slash the rate of corporation tax and overhaul the sclerotic labour market. State spending will be clipped by expunging 120,000 jobs from a bloated civil service. Newly confident private-sector firms will create many thousands, even millions, of new jobs.

    In any other country — and perhaps at any other time — this would be a recipe for success. In the near-term, investors would flock to domestic stocks and bonds while the currency would strengthen. In the longer run, capital expenditure and employment would tick up, as corporates, released from uncertainty, put cash reserves to work.

    But this is France, and we have been here before, and investors are rightly wary. Emmanuel Macron’s victory in the first week of May was greeted with great shuddering sighs of relief across much of Europe. While he extolled European comity, his opponent Marine Le Pen favoured a ‘Frexit’ referendum, with the aim of forcing the EU to change or risk losing France as well.

    The European project can cope without Britain. But carelessly losing two member nations in succession would be a death blow. Europe would fracture, growth rates would crater, jobs would disappear, and, apart from ‘vulture fund’ buyers of distressed debt, the region would become a dead zone for investors.

    So it was curious to see the market’s reaction on 8 May, the first full day of post-election trading. Stocks that surged after the first round in late April fell back. The euro dropped against the dollar. French securities were weaker, with the CAC 40 index down 1 per cent. Germany’s DAX fell, as did the Euro Stoxx 50, a basket of the largest eurozone shares, while the FTSE100 stayed flat.

    This came as little surprise to some. After Macron secured more votes than any other candidate in the first round of polling, his victory had already been priced in by investors. Once that was assured, enquiring minds looked further ahead, to two rounds of parliamentary elections slated for mid-June.

    Macron’s problem here is that, having run as an independent, he’s a president without a real party. If he can win enough friends in parliament, and secure a mandate both to lead and to govern, the new occupant of the Élysée Palace just might become the transformative figure the nation needs. Fail, and France faces another five years of economic mediocrity, rising debts, populism-fuelled turbulence, rising disparity with Germany — and at the end of it, the very real prospect of a Marine Le Pen coronation at last.

    Yet the curious thing is that for all the handwringing one hears in bars and sees on television, the Fifth Republic is actually doing quite well. Job creation is an issue, with unemployment at 10.1 per cent in March against 4.5 per cent in the UK and 3.9 per cent in Germany. But labour productivity is 28 per cent higher in France than it is in Britain, a country with a similar population size but undeniably worse infrastructure and public services.

    Blessed with luck and timing, Macron inherits an economy finally showing signs of life. Jessica Hinds at Capital Economics expects economic output to expand 1.5 per cent in 2017 and 2 per cent in 2018. That fits in with the wider picture. Germany is doing nicely; Ireland continues to power along. The European Commission tips eurozone growth to average 1.75 per cent this year and next.

    All of which should filter into stock prices. For all of the nation’s travails, France has a clutch of world-class corporates. Pick a sector and France typically has a blue-chip leader, from pharma (Sanofi) and cosmetics (L’Oréal) to insurance (Axa) and luxury goods (LVMH Moët Hennessy Louis Vuitton).

    This elite group, profitably multinational with robust earnings streams, also ‘trades at compelling valuations to its global peers’, notes Mouhammed Choukeir, chief investment officer at Kleinwort Hambros, ‘Against the S&P 500, where major corporates are trading at 30 times forward earnings, European blue-chips are trading at barely 15 times forward earnings.’

    World-class: France has blue-chip multinationals such as LVMH, owner of Louis Vuitton

    World-class: France has blue-chip multinationals such as LVMH, owner of Louis Vuitton

    Chris Beauchamp, chief market analyst at IG Group in London, says investors seeking swift returns from undervalued stocks should look no further than financial services: ‘Macron’s victory gives France’s banks the stability they need.’

    Neil Wilson, senior market analyst at ETX Capital, tips France’s big-three listed lenders, Société Générale, Crédit Agricole and BNP Paribas, to emerge strong and resilient from a miserable decade.

    The nation’s leading car-makers, Groupe Renault and Groupe PSA (new owners of Vauxhall) will also benefit from ‘a better European consumer climate,’ says Wilson, ‘with stability and growth encouraging people to make big-ticket buys.’

    For those with a yearning to buy French property, Macron’s triumph is also a reassurance. Now might be the right time to rummage around for that well-thumbed special issue of Country Life, with its lovely selection of Normandy châteaux and Côte d’Azur villas. France’s property market has ‘underperformed since the financial crisis’, notes Liam Bailey, global head of research at Knight Frank. ‘But with the economy improving, interest rates still very low and prices cheap on a historical basis, now might the right time to jump in.’

    But before you ring your stockbroker or estate agent, pause and think. These words of hope are dependent on the actions of an oratorically gifted 39-year-old who has never held office or stood for parliament and now faces a formidable to-do list, from rebalancing Franco-German relations and galvanising a fading Europe to finding the right balance on Brexit and cutting workers’ rights without incurring the wrath of the nation’s feared unions.

    French stocks and property look a lot more attractive today than in the dying days of the Hollande presidency. Investing in them could be one of the best decisions you’ll ever make — but it’s a bold bet on the effectiveness in office of Emmanuel Macron.