French government bonds have been rocked by turbulence in the country’s presidential election campaign in recent weeks. But French equities have remained remarkably resilient.
More than €1.3bn flowed into French equities over the 10 weeks to February 15, according to data from EPFR Global, the research provider. December was the first month in which French stocks experienced inflows since January 2016.
While bonds have suffered from fears about the threat of Marine Le Pen, the far-right candidate, pulling France out of the euro (redenomination risk) and the possibility of a break-up of the EU, investors say that French-listed multinationals would not necessarily be adversely affected.
That has helped to drive the CAC 40, the French blue-chip stock market index, up more than 10 per cent over the past three months, along with other European stock markets.
Many CAC 40 companies get the majority of their revenues from overseas, which limits their exposure to domestic and eurozone political risks. Of the companies that make up the CAC 40, 80 per cent of their exposure is outside France and 50 per cent is outside Europe, says Manish Kabra, European equity strategist at Bank of America Merrill Lynch.
And while a French exit from the euro remains a remote possibility — the probability of Ms Le Pen becoming president in May is about 25 per cent against around 45 per cent for Emmanuel Macron, her centrist rival, according to Betfair Exchange, the betting website — if it did happen, a drop in the value of the new French currency against the euro could provide a further fillip to share prices of companies in the CAC 40.
Anthony Gilham, head of multi-asset investment at Old Mutual Global Investors, the London-headquartered investment house, draws a comparison with the UK stock market reaction after the Brexit vote last year.
Shares in FTSE 100-listed companies with sizeable overseas earnings, including HSBC, the bank, GlaxoSmithKline, the pharmaceutical company, and Wolseley, the construction company, rose after the UK referendum as the fall in the value of the pound increased the value of revenues earned in dollars.
Mr Gilham says that share prices of companies in the CAC 40 with significant overseas earnings could also go up if there were a French exit from the euro and currency effects made those earnings worth more in the new French currency.
“There are many companies in the CAC 40 that have revenues outside France, where the translated value of overseas earnings would be higher [after a devaluation],” he says
Broader economic trends are also positive for French companies.
The French services industry drove the eurozone-wide purchasing managers’ index, an early indicator of economic growth prospects, to its highest level in almost six years in February.
And French companies stand to benefit from cyclical investment trends according to Mr Khabra, who names Peugeot, the carmaker, and Bouygues, the industrial company, as two of the groups likely to perform best over the next phase of the investment cycle.
But the rise in flows to French equities does not tell the whole story. Most of the demand for French stocks over the past three months was driven by global passive funds that track France as part of their benchmark and which have benefited from the global equities rally since Donald Trump’s election as US president in November.
A closer inspection shows investors in French-focused funds have been more wary. While there were inflows to mutual funds specialising in French equities in early February, investors pulled money out in the third week of February, data from EPFR Global show. Investors in these funds withdrew about $38m from the funds between the start of January and mid-February.
Enthusiasm towards French equities among fund managers has also flagged according to BofAML’s monthly survey of investors, suggesting the election may be affecting the investment decisions of active managers.
In February, 24 per cent more investors said they would reduce their exposure to French shares below the benchmark level over the next year compared with those who would increase their allocation. The negative attitude represents a big change from a month ago, when the net position was neutral, and is the lowest level for almost two years, according to BofAML.
Giuseppe di Mino, managing director at Amber Capital, a hedge fund, acknowledges the overall rise in flows to French equities but agrees that uncertainty around the election may be holding active investors back from making further investments.
“Allocations to [European equities] are very low compared with historical trends. People want to see some stability in the political space. If we do not have any surprises from the ultra-left or ultra-right [politicians], then we should see inflows [to France] in quite large volumes.”
While polls all show Ms Le Pen ultimately losing, fluctuations in the polls have affected French and German bond yields and demand for euro currency hedges.
The premium that investors demand to hold 2- and 10-year French national debt over German bonds — a reflection of how much more risky they consider France — hit its highest level in four years in February, before receding over the past week as Mr Macron’s lead has strengthened.