Following France’s recent win in the World Cup, now is an interesting time to look at the French economy. With population morale at a peak, it’s possible that confidence indicators could have changed, making it a more attractive destination for investors.
To begin with French economic fundamentals, let us look at the issues that are being dealt with by the French President Emmanuel Macron. France has historically dealt with low competitiveness, low productivity (a problem many developed nations have been dealing with since the Great Financial Crisis, most famously Britain), as well as heavy tax burdens and inflexible labour laws. Macron has made a valiant effort in his first year of office by attacking issues in the cumbersome French tax code, as well as the inflexible labour code that added even more costs to a business’ bottom line. He has tackled these issues by reducing the corporate tax, simplifying labour taxation, and redesigning complete capital gains tax, all of which can and will incentivize new business investment both domestically and externally. These labour reforms explain why there has been a surge in foreign direct investment, otherwise known as FDI (see image below) and this strength has continued into 2018 as the French capital has been the most invested in place by foreign investors this year, as reported by Reuters.
There has also been an increase in venture capital investments into France, especially around the high tech sector which is where France’s skills within data science and engineering can truly come to fruition and help raise its productivity and competitiveness globally. This can help push France’s potential GDP growth higher, making it more appealing to investors.
Another issue that has typically put a black mark on France has been the historically high and growing levels of public debt that is associated with the Eurozone sovereign debt crisis and the Great Financial Crisis of ’08-’09. The Macron administration’s budget has begun to address this by attempting to stabilise the debt load (see image below). It is not completely unsustainable in the context of a country such as France due to the size of its economy and its position amongst international investors.
Another positive factor for France is the strengthening labour market, with nominal wages increasing and further feeding into the government’s receipts, as well as continued strong business investment as previously mentioned. Business confidence remains at a decent level, exemplifying France’s ability to attract investment money (see image below).
France also experiences strong export growth, however, this does face potential downside due to the continuous threats made by various parties in the international trade world. Despite this, any expansionary fiscal policy undertaken by an EU member, especially a large economy like Germany, could help outweigh some of this risk as mentioned by the Banque de France. This is possible due to Germany’s role as France’s largest trading partner, accounting for approximately 16% of France’s exports. Other major EU members such as Italy and Spain are respectively France’s second and third largest trading partners further insulating France from some of the global trade chills. All of this plays into the forecast of France’s GDP increasing by a respectable 2% in the near future.
iShares MSCI France (NYSEARCA:EWQ) provides investors a coherent and viable way of taking advantage of the positive climate around France and making a targeted play on the Eurozone, and is bolstered by Macron’s likely economic reforms pushing France’s potential GDP higher. Speaking to the specifics of the ETF, there is large exposure to French industrials, consumer discretionary and financials (see images below).
Beginning with French financials, they have been recently strengthening their capital buffers, and continue to enjoy the accommodative monetary environment provided by the euro while decreasing their exposure to non-performing loans which remain an issue in other parts of the Eurozone (see image below). French financials also provide exposure to not just the domestic French financial sector, but to international sectors both across the EU and outside of those borders.
Consumer discretionary will presumably be cyclical, and can be expected to increase with French wages on the upswing and decreasing unemployment. It can also benefit from the consistently high popularity of Made in France/French Luxury Goods, which are still strong across the world with products like Louis Vuitton and Moët & Chandon being particularly desirable.
French industrial sector will benefit from the increase of investment, both FDI and domestic fixed investment. The French industrial sector holdings include multinational oligopoly aircraft maker Airbus, as well as more domestic focused firms and will similarly to consumer discretionary be experiencing the upswing in the current cycle both internationally, regionally and domestically and the investor can capture some of this upside now, but should be aware of the cyclical nature of this sector.
In conclusion, France has a lot of goodwill and momentum investing going for it from institutional and international investors, and is improving economic fundamentals in hopes to continue strengthening them in the medium term. EWQ is a long term play that is reliant on the strength and continuation of Macron’s reforms, a likely scenario which makes it a good pick for Eurozone exposure.
