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French stocks are on track for their weakest annual performance since the depths of the euro zone crisis, as investor concerns about tariffs and political turmoil combine with weak demand for luxury goods.
The CAC 40 index in Paris is down 3 percent this year, compared with a 6 percent gain for the region-wide Stoxx Europe 600 index, after a strong start to the year driven by fading bumper sales for companies such as LVMH.
Investors have been reluctant to invest due to the political crisis, slowing demand from China's main export market and the weakness of the local economy. Adding to the feeling of distress is the possibility of a trade war after US President-elect Donald Trump threatened to impose comprehensive tariffs on goods.
“There are so many things happening at the same time that people want to move away from French names,” said Roland Kaloyan, head of European equity strategy at French bank Société Générale. “This contraction has been very noticeable.”
Analysts said that the political turmoil had a significant impact on the French market, as François Bayrou became the country's fourth prime minister this year.
This crisis has intensified the debate over how the country should address its growing budget deficit. Investor concern about the country's finances has pushed 10-year borrowing costs above 3 percent this year, and the extra spread France is paying on benchmark German debt has reached its highest levels since the euro zone debt crisis.
Earlier this month, Moody's downgraded France's credit rating following a no-confidence vote by the government of outgoing Prime Minister Michel Barnier, citing a “significantly weaker” economic outlook.
The decline in French stock prices stands in stark contrast to its neighbor Germany, where it reached 18.7 percent Gains in the country's stock market This year, she has defied the gloom shrouding her local economy.
Luxury goods companies, the cornerstone of the CAC 40 index, are struggling as it becomes clear that China's economic recovery from the pandemic has stalled.
The rise of middle-class Chinese shoppers this century has transformed the profits of luxury goods companies, with consumers flocking to European and Asian capitals alike to buy designer handbags and other goods.
Then Covid led to a surge in purchases as bored shoppers stuck at home spent their holiday payments on luxury accessories and liquor. Profits of companies like LVMH as well as beauty giant L'Oréal have grown by double digits.
But Chinese shoppers have curbed their spending due to fears of a possible severe economic slowdown. Beijing announced comprehensive plans to stimulate confidence in the economy and markets.
“The great disillusionment in China has probably bottomed out,” said Caroline Reel, head of premium brands at Pictet Asset Management, adding that she was now waiting for Chinese government stimulus to translate into consumer activity because she “does not expect a downturn.” “The situation worsened.”
However, more than a fifth of the CAC 40's components are consumer goods companies with “significant” exposure to China, including LVMH and Kering — which are down 12 and 40 percent this year, respectively.
Emmanuel Cao, an analyst at Barclays, said the market was “divided” on whether luxury goods companies would bounce back in 2025 or whether profits would weaken again. The sector is expected to grow by just 3 percent next year, in constant currency terms. He added: “This was a year of pain.”
It's a combination that puts the Cac 40 on track to become the only major stock market worldwide to end the year in negative territory.
French banks and insurance companies, which make up 10 percent of the index, fell sharply because they are vulnerable to slowing economic growth and also have large government debt, which investors now consider more risky.
Shares in BNP Paribas, Europe's largest bank and often traded by investors as a proxy for the French economy, have fallen 8 percent this year.
Intense competition from electric car makers in China and political turmoil have hit automakers, including Stellantis. Shares in the company behind the Peugeot, Fiat and Jeep brands have fallen 41 percent in Paris this year.
While the CAC 40 is struggling, French companies are beginning to explore other capital markets. Pay TV player Canal+ included in London this month, although shares have fallen about 30 percent since trading began.
Total Energia said it was “seriously exploring” a US listing, while Tikehau, a fast-growing asset manager, told the Financial Times last month that it was considering moving its listing from Paris to the US.
However, France's struggles also reflect the challenges politicians on the continent now face, which include stimulating growth and the looming possibility of a global trade war with sweeping tariffs after Trump's election victory.
“We need some kind of catalyst for Europe to take care of itself,” Barclays's Cao added. It used to depend on China but now the world is less globalized and China is growing less.
Additional reporting by Ian Smith
