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French stocks are on course to deliver their weakest annual performance since the depths of the Eurozone crisis, as investor worries over tariffs and political turmoil combine with lacklustre demand for luxury goods.
Paris’s Cac 40 index has fallen 3 per cent this year, compared with a 6 per cent gain for the region-wide Stoxx Europe 600, after a strong start to the year driven by bumper sales for companies such as LVMH melted away.
Investors have been put off by political crisis, sluggish demand from the key export market of China and a weakening domestic economy. The prospect of a trade war after US president-elect Donald Trump threatened sweeping tariffs on goods has added to the malaise.
“So many things are happening at the same time [that] people want to stay away from French names,” said Roland Kaloyan, head of European equity strategy at the French bank Société Générale. “This downturn has been quite remarkable.”
The political turmoil has weighed heavily on the French market, analysts said, with François Bayrou becoming the country’s fourth prime minister this year.
That crisis has intensified a debate over how the country will tackle a growing budget deficit. Investor unease about the country’s fiscal situation has already pushed its 10-year borrowing costs above 3 per cent this year and the additional margin that France pays over benchmark German debt has reached its highest levels since the Eurozone debt crisis.
Earlier this month Moody’s downgraded France’s credit rating following outgoing premier Michel Barnier’s government’s vote of no confidence, citing a “materially weaker” economic outlook.
The falling price of French stocks stands in stark contrast to neighbouring Germany, where a 18.7 per cent gain in the country’s stock market this year has defied the gloom enveloping its domestic economy.
Luxury goods companies, which are a cornerstone of the Cac 40, have struggled as it has become clear that China’s economic recovery from the pandemic has stalled.
The rise of middle-class Chinese shoppers this century had transformed earnings for luxury goods companies, with consumers flocking to European and Asian capitals alike to buy designer handbags and other goods.
Covid then supercharged purchases as bored shoppers stuck at home spent furlough payments on accessories and premium alcohol. Profits at companies like LVMH as well as beauty giant L’Oréal, grew by double digits.
But Chinese shoppers have reined in their spending on concerns over a potential sharp economic slowdown. Beijing has announced sweeping plans to stimulate confidence in the economy and markets.
“The big disappointment in China has probably reached a trough,” said Caroline Reyl, head of premium brands at Pictet Asset Management, adding that she is now waiting for the Chinese government stimulus to translate into consumer activity as she “doesn’t expect a worsening of the situation”.
Still, more than one-fifth of the Cac 40’s constituents are consumer goods companies with “heavy” exposure to China, including LVMH and Kering — which are down 12 and 40 per cent this year respectively.
Emmanuel Cau, an analyst at Barclays, said the market is “split” on whether luxury goods companies will bounce back in 2025 or earnings will weaken again. He forecasts sector growth of just 3 per cent next year, at constant currency rates. “This was a year of pain,” he added.
It is a combination that puts the Cac 40 on track to being the only major stock market worldwide to end the year in negative territory.
French banks and insurers, which make up 10 per cent of the benchmark, have fallen sharply as they are exposed to slowing economic growth and also hold substantial government debt, which investors now consider more risky.
BNP Paribas, Europe’s biggest bank and often traded by investors as a proxy for the French economy, has fallen 8 per cent this year.
Intense competition from China’s electric-vehicle makers and political turmoil has hit carmakers, including Stellantis. Shares in the company behind the Peugeot, Fiat and Jeep brands have fallen 41 per cent in Paris this year.
As the Cac 40 struggles, French companies have started to explore other capital markets. Pay TV operator Canal+ listed in London this month, although shares have slumped nearly 30 per cent since they began trading.
TotalEnergies has said it is “seriously exploring” a US listing, while fast-growing asset manager Tikehau told the Financial Times last month that it was considering moving its listing from Paris to the US.
However, France’s struggles are also reflection of the challenges the continent’s politicians are now facing, which include stimulating growth and the looming prospect of a global trade war with sweeping tariffs after Trump’s election win.
Barclays’ Cau added: “We need some kind of catalyst for Europe to take care of itself. It has been dependent on China but now the world is less globalised and China is growing less.”
Additional reporting by Ian Smith
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