Market Extra: France’s stock market is poised for a ‘golden decade,’ Berenberg economist says

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At a time when Europe is one of the global economy’s biggest question marks, with countries struggling against an uncertain and rapidly changing geopolitical environment that could have massive ramifications for their economic prospects, the country has quietly emerged as an investor favorite, with analysts touting it as the region’s next big growth story.

With the U.K. continuing to struggle with the fallout of its 2016 vote to leave the European Union, Italy burdened with a heavy debt load, and Germany facing political dysfunction of its own, France is seen as an oasis of relative stability, a characteristic that could allow it to zoom past its neighbors over the coming years.

“I believe France is set for a golden decade” in terms of performance, said Holger Schmieding, chief economist at Berenberg. “Germany just had one and now it’s France’s turn.”

Schmieding cited the 2017 election victory of President Emmanuel Macron as the primary catalyst for his optimism, saying that reforms Macron has made—particularly on the labor market, but also with respect to taxes—were setting a foundation for an acceleration of economic growth. He added that it was likely to grow as a business hub as it was cheaper than other major European cities, and as businesses might seek avoid London because of the uncertainty surrounding Brexit.

Read about Macron’s labor reforms here

Such optimism reflects a longer-term thesis, as the overall continent is facing a modest deceleration in growth. According to FactSet, economic growth in the eurozone is expected to come in at a 2.2% pace this year, and then slow to 1.9% in 2019. For France, growth is seen decelerating to 1.8% next year from 2.1% this year.

Courtesy FactSet

Vincent Deluard, global macro strategist at INTL FCStone, declared that France was no less than “the best country in the world” in a report published earlier this month.

“France is in a very enviable position compared to its major European peers,” the report read. “Its demography is much stronger than that of Germany or Italy. Its political system has adjusted much better to the new ideological fault lines than Britain’s. Its sense of national unity is much stronger than Spain’s. Its domestically-oriented, service-heavy economy is more resilient than the German export machine in the age of trade wars.”

He added that the country’s stock market appeared attractively valued relative to Europe overall. Based on the MSCI France Index, it has a forward price-to-earnings ratio of about 15.1, “slightly more than the 14.6 multiple of the MSCI Europe Index. But French equities are cheaper on a price-to-book basis, mostly because of the large share of relatively cheap banks in the index.”

The most popular way for investors to get exposure to the country is through an exchange-traded fund that tracks the country’s equity market by holding its major components.

There are two primary such products. The iShares MSCI France ETF EWQ, -0.61%  has about $940 million in assets, while the Franklin FTSE France ETF FLFR, +1.70%  is much smaller, with under $3 million. The Franklin fund—which tracks a different France-related index, meaning it has different performance—is far less traded, though it is cheaper, charging 0.09% of assets, compared with the iShares fund’s 0.49% expense ratio.

Thus far this year, about $242.8 million has flowed into the iShares fund, swelling its assets by about a third.

The inflows have occurred against a backdrop of tepid performance. The iShares fund is down 0.5% in 2018 while the Franklin fund is off 2.1%. A concentrated index of French companies, the CAC 40 Index PX1, -0.02% is up 2% this year; in May it hit its highest level in more than a decade. For comparison’s sake, the S&P 500 SPX, -0.17%  is up 6.9% in 2018.

Berenberg’s Schmieding said he would recommend a France-focused ETF as a way to gain exposure, though he cautioned that while such products do exclusively hold French companies, the largest such firms were international in nature, meaning they didn’t derive a majority of their revenue from domestic sources. Companies in the iShares fund, according to FactSet data, only have revenue exposure of 21.3% to France.

Berenberg’s economist didn’t recommend specific stocks, but said he would favor companies in the construction or real-estate sectors. “The things that are actually tied to the place” should do best in the coming decade, he said.

Deluard said that French real-estate investment “would be another natural investment conclusion” beyond simply buying an ETF, though he said he was concerned about the impact rising interest rates would have on the sector. “On the other hand, French banks are a good play on the country’s renaissance that also offers cheap valuations and positive rate sensitivity,” he wrote.

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