GO
Loading...

Why Socialism may make France's stock market rally

Tuesday, 13 Aug 2013 | 10:18 AM ET
Charly Triballeau | AFP |Getty Images

Stock market success may traditionally be associated with pro-free market rather than socialist governments but, according to Societe Generale, one key reason why French shares are set to push higher is France's current left-of-center regime.

Paul Jackson, a research analyst at Societe Generale, said that France's left-wing government helped explain why the French CAC 40 had outperformed Germany's benchmark DAX 30 index over the past 18 months.

"The final ingredient to favor the French market could be the Socialist government," Jackson said in a research note on Monday. "Strange as it may seem, the outperformance of the CAC versus the DAX since early 2012 (the government was elected in early June), is perfectly in line with historical precedent."

The chart below suggests, according to Jackson, that investors in the French market should welcome the Socialists with open arms:


But it's not just a Socialist government that could cause a rally in the nation's CAC. Jackson pointed to a slight turnaround in France's trade balance with Germany as a sign the country is beginning to regain competitiveness.

"The market is cheaper than that of Germany, the government is reforming in its own way, we expect the GDP (gross domestic product) growth gap to close, and profits are likely to outstrip those from across the Rhine," he said.

"Consequently, we expect France to outperform Germany and remain 'overweight' the former while being 'underweight' the latter."

European equities more attractive than in US: pro
Martin Leclerc, CIO and portfolio manager at Barrack Yard Advisors, explains why he prefers continental Europe and Singapore equities over American ones over the long term.

Despite SocGen's bullishness, France's economy has fared significantly less well than Germany's over the past decade, with Germany enjoying an export-led boom and a strong current account surplus since the introduction of the single currency in 1999. Meanwhile, France posted zero growth last year, and pessimism about its economy has risen since Fitch Ratings became the third major ratings agency to strip it of its AAA rating, in July.

(Read More: France's Hollande 'in denial' over crisis after downgrade)

Pierre Moscovici, the French finance minister, told CNBC last month that France was in a worrying situation, but that growth will return in the second half of the year, as measures to stimulate job creation bear fruit.

(Read More: France in a 'worrying' situation: Moscovici)

Nonetheless, Ashraf Laidi, chief global strategist at brokerage City Index, agreed the French benchmark stock exchange was cheap when compared with Germany's.

"The DAX 30 is 1 percent away from its record highs attained in May versus the CAC 40, which is 40 percent below the all-time highs reached 13 years ago," Laidi told CNBC.

"German equities may become more hesitant in clawing further ground ahead of the September election. From a growth point of view, there's more room for upside for French GDP out of contraction territory, than in the case of Germany."

The mood from SocGen and City Index is matched by a feeling of optimism on European stocks in general. Analysts and investors have told CNBC the continent's stocks look undervalued as it nears the end of its recession.

Willem Nabarro, head of European equities at Exane BNP Paribas, told CNBC on Tuesday that consensus at the bank was for an "overweight" rating on European equities, and had been for some time.

(Read More: European equities looking cheap as recession eases)

By CNBC.com's Matt Clinch. Follow him on Twitter @mattclinch81

  Price   Change %Change
CAC 40
---
DAX
---

Contact Europe: Economy

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    › Learn More