Let’s Be Franc

Conrad de Aenlle is a London-based freelance writer

In the last decade, societies throughout the world have forsworn the rigidity of statism for the freedom and opportunity of open markets.

And then there’s France.

The French reconfirmed their love of central authority by electing a Socialist-Communist coalition last month that vowed to raise the minimum wage--already close to $10 an hour, including mandatory benefits--cut the workweek to 35 hours, and to relax the fiscal discipline required for European economic and monetary union.

Dominique Strauss-Kahn, the nation’s new finance minister, didn’t help reassure capital markets when he quoted Marx last weekend at the Group of 7 meeting of the leaders of major economies.


A nice place to work, maybe, but arguably not fertile ground in which to invest.

“They’re stuck in the ‘70s,” said Clark Winter, head of a New York investment fund consultancy. “I don’t want to insult the French, I just wouldn’t put a nickel in their market.”

Some of those who had committed money in larger denominations were desperate to get it back immediately after the election, as the French stock market plunged more than 10% in just over a week. Yet it has since recovered much of that. Still, the advice of fund managers and analysts who assess investment prospects in France is that although some stocks may be worth a look, it’s a market best avoided.

“The Socialist victory is bad news for the French stock market,” argued Eric Chaney, who covers French economics for Morgan Stanley & Co. “Privatizations are likely to be stopped and wage costs to increase. French equities are likely to see a long period of under-performing the other Continental European markets.”

He added that the new government is also likely to make it more difficult to contribute to private pension plans. Limiting this incentive to buy stocks will hurt because the French already are not big buyers of stocks. In much of the public psyche, equity investing is a virulent symbol of capitalism, a devious Anglo-Saxon plot intended to impoverish the masses and sow division in society.

The typical Frenchman will occasionally buy bonds but far more often will leave his cash in a money market fund. Starting four years ago, the government made an attempt to wean savers from this habit by privatizing several large state enterprises and selling them at knockdown prices. Unfortunately, prices were knocked down much further once trading started.

“The privatized companies’ performance in France is a sore topic with most investors,” observed Roger Monson, chief equity strategist at Daiwa Europe. “People look at French privatizations with a very jaundiced eye. You won’t get a worse deal for your money on the rue de Rivoli.”


Paris’ main shopping street isn’t known for giving much of a break to shoppers, especially tourists. It’s been the same at the Paris Bourse, several blocks north. The CAC-40, the main index of French shares, has risen 19% this year, a respectable showing. But since December 1989, the index is up a mere 38%, versus a 150% rise in the U.S. Standard & Poor’s 500 index.

Moreover, because the franc has fallen sharply against the dollar this year, the year-to-date gain for American investors is a meager 6%, compared with 21% for the S&P.;

And there’s a good chance the franc will fall further. The new administration is anxious to rewrite the rules under which European Union states will be eligible to merge their economies and adopt a common currency, the euro.

The fear is that Europe will end up with a “hard EMU” (economic and monetary union) without France, which could sink the franc, or a “soft EMU” with everyone, even Italy and Spain, which would probably mean a weak euro against the dollar. Either way, the dollar strengthens against the French currency. The best hope for investors is for France to drop its objections to union terms.

“It’s a very one-sided bet,” Monson remarked. “If everything works, you keep what you got; if it doesn’t, you lose quite a bit. I wouldn’t want to go to a roulette wheel with those odds.”

Even without the currency threat, it’s hard to make money in France. With stratospheric labor costs and taxes, protectionism and a culture that regards it as business’ duty to inflate employment at the expense of profit, industrial productivity is among the lowest of any developed country. Many foreign institutions view the election result as a double negative: It confirms fears that the French, like an addict, don’t just disdain the cure but need increasing amounts of what ails them.


“Not only is the Socialist program likely to be counterproductive,” a report by Credit Suisse First Boston states, “but the lack of liberal reforms which France urgently needs will probably take its toll. Investors might wake up to the current euphoria with a hangover.”

Credit Suisse has been cutting its exposure to French stocks for more than a year, to the point where France has become its least-favorite European market for its size. The firm’s analysts expect the CAC index to end the year at 2,650, down from 2,762 on Monday.

Templeton Investment Management is more hopeful. Its global funds are slightly over-weighted in France, reflecting admiration for the ability of corporate France to make the best of a bad system.

“The French are pretty pragmatic at the end of the day,” said Ken Cox, a Templeton portfolio manager. “They work around problems. . . . They certainly have a social system that will have to change.”

One of the ways pragmatic French executives make money is by doing as little of their business as possible in France. Companies with extensive foreign operations generally have lower labor costs and receive more of their revenues in stronger currencies.

These companies figure prominently in stock recommendations from French market specialists.


The difficulty for American investors is that the dozen or so French companies traded on U.S. markets seem to fall into both categories, being largely a collection of one-time state enterprises.

There is a closed-end fund that invests in a variety of French companies. France Growth Fund (FRF) is currently trading on the New York Stock Exchange at a 22% discount to its underlying value--a sign of investor pessimism about its prospects. A few global funds have fairly high exposure to France, according to fund tracker Lipper Analytical, in particular Dreyfus Premium Growth Fund (about 13% France) and Oppenheimer Global Growth and Income (12%).

One stock everyone mentions is the oil giant Elf Aquitaine--only for some it’s a buy and for others a sell. For Marcus Smith, European research analyst at Massachusetts Financial Services, a Boston fund manager, a meeting with its management made a bad impression. “It was the worst meeting I ever had, and I thought, ‘I’ll never own this company.’ They took offense at questions--about their restructuring program and cutting costs.”

The problem, Wendy Anderson, an analyst at Lehman Bros., explained, is that “Elf has not been lucky with the drill bit.”

She noted that Elf and its French rival Total, both of which trade on the New York Stock Exchange, are very similar companies on paper, but that since the start of the decade, Elf’s production has been flat while Total’s has nearly doubled. Total’s shares are priced relatively higher than Elf’s as a result, but they are still a better buy, she said.

Smith, despite his unpleasant experience, decided to buy Elf after all, finding the price attractive after the company’s mishaps. His decision was rewarded when the stock shot up late last year.


“It’s gone from a bad oil company to an average oil company, but it’s still valued lower than others,” Smith said.

Credit Suisse also likes Elf, even if it doesn’t much like France; it also has a buy rating on luxury goods maker LVMH Moet Hennessy Louis Vuitton, traded on Nasdaq. Daiwa’s Monson recommends LVMH, too, and other prestige-product concerns such as L’Oreal.

Another stock Smith likes is Geophysique, which conducts seismic tests in jungles in South America and Africa for the oil industry. Noting that 30% of the staff had been laid off, something that should soon show up in improved profit margins, Smith described Geophysique as “a good recovery story.” It, too, trades on the NYSE.

Smith advised avoiding French banks and is neutral on AXA, a large insurance company that owns the U.S. insurer Equitable. He is also wary of France Telecom, the state telephone monopoly.

Telecom, France’s largest company, was due to be privatized in a bid by the political right to achieve desperately needed restructuring. But with the Socialists in power, there is a good chance the sale will be canceled.

It could be the best gesture to investors the new government makes.

“There’s not a lot of growth in the company,” Smith argued. “All the workers have civil-service guarantees. Earnings growth is only 5%, and if [sales] volumes come in lower, it could be 0% growth instead.”



Sacre Blues

The main French stock index, the CAC-40, has gained just 38% since 1989, versus a 150% gain for U.S. stocks, a 110% gain for German stocks and an 89% gain for British stocks.

(Please see newspaper for full chart information.)

Monday: 2,762.20