“A Problem Shared is A Problem Halved” – De Pierre Corneille

• France has struggled with wide scale “Yellow Vest” protests since November 2018

• April 2019 witnessed new Tax Cuts and the conclusion of France’s “Great National Debate”

• Recent economic data suggests French consumers are well positioned to increase spending

• France’s momentum “ranking” has improved from 29th in March to 17th in May (out of 35 countries)

April 2019 marked the end of France’s “Great National Debate”, which began in January, and resulted in the French president listening to grievances and answering queries in public debates for a total of 92 hours. All in, the consensus seeking exercise included 1.9 million contributions to the online forum, 10,134 town hall meetings, 16,337 “books of grievances” submitted by mayors, 27,374 emails, and 21 citizen assemblies. 

President Macron launched the great national debate in response to the “Yellow Vests” movement that began last November as a protest against higher taxes on motor fuel (France already has the highest overall tax take as a share of GDP in the European Union), but grew into a widespread and sometimes violent rebellion against Macron’s “haughty style and top-down method of governing”. 

The results of the great national debate (digested by tech firms using AI) revealed a few areas of national consensus – curbing climate change is urgent, taxes are too high, local governments are too weak, and bureaucracy is widespread, as well as, a few areas of contention – migration policies, and how to balance lower taxes with lower public spending.

Accordingly, on April 25th, President Emmanuel Macron cut taxes to assuage yellow vest protesters. Macron boosted pensions, reduced income taxes, and pledged to cut taxes further if the French would work more.

Throughout this process, the protesters taking part in weekend marches dropped from 280,000 in November to 22,000 in April.  Furthermore, during the first quarter of this year, the French economy expanded, and relative to the final quarter of 2018, domestic demand made a robust contribution to overall growth.

Bloomberg analysts expect growth in domestic demand to remain robust in coming quarters, supported by improvements in household finances:

• Disposable income rose 1.2% in 4Q. Income growth is expected to be robust in 1Q as well.

• Consumers have saved most of this extra income, raising the saving rate to 15.3% in 4Q from 14.3% in 3Q.

• This quarter’s consumption numbers suggest consumers are ready to spend more of this income, which will help support growth.

The MSCI France Index provides broad exposure to 80 French companies, including some of the world’s most recognizable companies and brands. Top holdings include Total, LVMH Moet Hennessy, Sanofi, Airbus, L’Oréal, BNP Paribas, Vinci, and Kering.  The index (tracked by EWQ ETF) is allocated 22% to Industrials, 18% to Consumer Discretionary, 11% to Financials, and 11% Consumer Staples. 

Since late 2017, MSCI France profitability (10.5% ROE) has trended higher, and Sales Growth (3.7%) has more than tripled, suggesting reasonable “brand quality” and “pricing power”. While France remains beholden to the macro risks facing the European Union (Brexit, ECB Policy, and US Trade Negotiations), there are green shoots of optimism appearing in France: leading economic indicators are accelerating, short-term price momentum is strong, sovereign credit risk is dropping, and price-to-earnings valuations are 2.6 EPS turns lower than 5 years ago.

These characteristics combine to push France to #3 in the Accuvest Country Rankings, up from 34th in February.  We anticipate France (EWQ) will be a productive country allocation within global equity portfolios.  Forward expectations for Europe in aggregate remain weak, but any recovery is likely to be led by France, supported by lower risk, good fundamentals, improving momentum, and reasonable valuations. 

Sources: Economist, Bloomberg, MSCI, Accuvest