The new France emerges

In a market beset by French government reforms and decreasing numbers of financial analysts and IPOs, InvestmentEurope looks to the impact on French equities.

Reforms. The word currently has been attracting pretty much all discussion in France given the number being considered by the government.

They include a major reshuffle of labour laws, and a law that will oblige multinationals to prevent all abuses of their subsidiaries or subcontractors – changes that may impact the French equity universe.

The context is that French stocks have performed well in recent years, says Vincent Durel, portfolio manager of the Fidelity France Fund.

He suggests that a key reason why they have done so is their low exposure to the local market; a number of French listed companies achieve around 10% of their turnover in France.

“Since the crisis, the French economy has been very resilient, contrary to countries such as Spain and Italy. Why? Because the weight of public expenditures is heavier.”

“However, France shows inability to benefit from a rebound. The French economy remains inert, which is a good thing during crisis periods but somehow frustrating when recoveries occur,” he explains.

“France seems behind compared to other European countries since the crisis because the global environment has been disappointing and because of a distinction that is being made between countries having implemented labour reforms and others that have not.

“Most investments made in Europe have been for maintenance. A few have been growth investments and they have not been in France, but in Spain as productivity and competitiveness were higher due to reforms,” Durel explains.

Confidence issue

Regarding French president Francois Hollande’s mandate, Durel assesses that he has added burdens to French companies.

He sees the tax credit (CICE) Hollande implemented to boost competitiveness as “clearly a step in the right direction.” But Durel believes that over Hollande’s full mandate, French companies will not have benefited from any decrease in social charges.

“The worst remains the confidence issue we face in France. French entrepreneurs have no visibility on their future because the legal framework changes nearly each half-year. U-turns in government plans lead to a wait-and-see situation,” Durel points out.

The manager says reforms will not change anything and hopes debate around the presidential election in 2017 will bring issues of French companies into the light.

Augustin Bloch-Lainé (pictured), fund manager of Amplegest MidCaps and Amplegest PME, says that the labour reforms ongoing in France focused primarily on the flexibility of employment contracts will have little impact on French small and mid-caps.

“In terms of sectors, the outsourced R&D is benefitting from the current inflexibility of employment contracts,” he says.

Another comment by Bruno Cavalier, chief economist at Oddo Securities, recently highlighted the risk that labour reforms may also create new regulations to offset flexibility-enhancing measures.

“This is often the way that reforms are carried out in France,” he added.

Analysis
Other issues especially hang over French small and mid-cap listed companies.

Earlier this year, the French financial analyst association SFAF sounded the alarm on the diminution of sell-side analysts in Paris, from over 700 in 2000 to 550 currently.

One-third (133) of the 400 French small and mid-cap companies split between the CAC Small index and the Alternext market in Paris are no longer followed by analysts.

While Durel stresses regulatory pressure on brokers and money being reallocated to liquid listed companies, he and Bloch-Lainé believe the situation represents an opportunity.

“Sell-side analysts can make you discover new stocks but I mainly use them to refine my estimations. A non-covered stock remains an opportunity. It is not known and it has a discounted valuation. Discovering a non-covered gem is a way to differentiate against competitors.”

“The growth of the company materialises, margins rise, the liquidity issue lowers as the capital grows, leading to a better coverage by other asset managers,” Bloch-Lainé argues.

“Stocks not covered by sell-side analysts are an issue only for asset managers relying heavily on their analysis because it means they cannot invest in a huge part of the French equity universe. Sometimes, stocks are no longer liquid enough. That’s why sell-side analysts no longer cover them,” he adds.

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