France’s stock market likely to remain a laggard - Capital Economics

Investing.com - France’s stock market is likely to remain a laggard, weighed down by worries over ongoing political instability and fragile public finances, according to analysts at Capital Economics.

In a note, the analysts flagged that financial markets in Europe’s second-largest economy have been "under the cosh" for much of this year, with near-constant turmoil in the country’s government driving up bond yields and denting domestic financial industry stocks in particular.

The sector in MSCI’s France index has "significantly underperformed" a similar gauge tracking large- and mid-cap names across 10 developed markets in the European Economic and Monetary Union (EMU).

"Although the valuation of that sector now looks relatively low, it could remain in a funk if, as we envisage, concerns about the public finances persist. And there are other reasons to doubt a comparatively strong rebound in France’s overall stock market," the analysts including John Higgins wrote.

France’s weight in MSCI’s EMU-focused index at the end of September stood at just over 30%, larger than any other country in the eurozone currency area but "steadily undermined by a relatively poor showing," the Capital Economics analysts said.

The performance of MSCI’s France index going forward will partly depend on what happens in sectors like industrials, which has the highest weighting in the average, they added. While the economic outlook in France is not viewed as "conducive to a continued strong performance" from the segment, the analysts argued that fiscal stimulus in Germany -- Europe’s economic powerhouse -- is unlikely to be "game changer" either.

"If we’re right, at least the relative performance of the industrial sector in MSCI’s France index might not be bad," they wrote.

Consumer discretionary firms, which include big-name luxury groups like Kering and LVMH, represent a "chunky weighting" in the MSCI France index as well, they said. Due to these companies’ reliance on sales in the U.S. and China, the economic trajectory of the two countries could have an impact on the wider index.

To that end, the Capital Economics analysts said that while the outlook for the U.S. is "bright," they are "less upbeat about the prospects for economic growth in China."

The MSCI France index may also lag the EMU average if "big-tech" sectors "lead the charge amid growth enthusiasm for artificial intelligence," they said, noting that information technology shares in France have actually "fared poorly" so far this year.