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By Martin Hutchinson
In an address to the U.S. Congress on Wednesday, French President Nicolas Sarkozy criticized "the vagaries and excesses of a financial capitalism that currently leaves too much room for financial speculation." For decades, conservative Americans have relegated France to the global also-rans, condemning it as an "Old Europe" denizen with a sclerotic economy that runs in slow motion. Either they have to be wrong, or Sarkozy does – and there's money to be made from figuring out which.
Not the French Economy of Yore
One of the great secrets here in the United States is that France's economic performance hasn't been that bad. Productivity growth – the key to long-term wealth and stock market profits – was 2.0% per annum in the 10-year stretch from 1996 to 2006, compared with 2.3% in the United States, according to the Groningen Group Total Economy Database. Since those 10 years included the U.S. "productivity miracle," and the years of supposed "Eurosclerosis," it's clear that the normally disdainful U.S. attitude toward the French economy is in need of some serious adjustment.
There are problems in the French economy, of course, just as there are problems in the U.S. market. The 35-hour workweek, introduced in 1995, has added substantially to French companies' costs, and caused French unemployment to remain at a stubbornly high 8%. French public spending – and therefore taxation – is much higher than in the United States, at around 53% of gross domestic product (GDP), which causes a persistent budget deficit of about 3% of GDP, also higher than the United States.
The Gini index of inequality is only about 0.27 compared with 0.45 in the United States, which makes French society remarkably egalitarian, but tends to remove the incentives to entrepreneurship. On the other hand, even though France is a member of the strong-currency euro, its current account deficit is only 1.2% of GDP, far below the 5.6% deficit of the United States.
The U.S. Spec-Wreck
Given the subprime mortgage problems that U.S. financial speculation has caused – not to mention the huge write-offs the largest U.S. banks and brokerages have been forced to take – it's not unreasonable for Sarkozy to criticize the speculative excesses of Wall Street. Close examination of the statistics indicates that these are not a necessary tradeoff for much better U.S. economic performance … they are an abnormal outgrowth of a U.S. performance that is only a little better than France's, and that may actually have stored up significantly more dangerous problems in the years to come.
Indeed, if Sarkozy succeeds in reforming the French labor market, as he has promised to, French economic performance may even succeed in leapfrogging the U.S. performance in the years to come. Under that scenario, the newly liberated French labor market would enable that country's economy to become more efficient, which would lower France's unemployment rate.
From that vantage point, it makes sense for a U.S. investor to look at French stocks, if only as a modest diversification from his domestic investments and his forays into emerging Asia. So what's out there that a U.S. investor might want to buy?
The Way to Play to Pay
First, you can buy the index. The iShares MSCI France Index (EWQ) is an exchange-traded fund (ETF) with a value of $461 million – sufficient for liquidity. It is currently trading at the French market's price-earnings ratio (P/E) of 13.3, which is significantly below the P/E of 15.7 for the Standard & Poor's 500 Index. With France showing no signs of imminent recession, and without the large write-offs in its financial sector, you'd probably expect the index to trade at a premium to the S&P, making this French ETF a bargain buy right now.
For a corporate investment, let's look at the largest pharmaceutical company in Europe: Sanofi-Aventis (SNY). As a Scrooge-like investor [despite what my publisher believes, my middle name is not Ebenezer], I consider this company's trailing P/E of 21 to be a little rich. Given the U.S. dollar's decline against the euro, SNY's earnings are growing quite rapidly in euro terms and very rapidly in dollar terms, so the company's forward P/E ratio, based on its projected 2007 earnings, is only around 11 [Now that's a stock play that our dear friend Ebenezer would find alluring, indeed].
Another solid French buy is France Telecom (FTE), which operates both fixed and mobile telephone systems in France, Britain, Spain and Poland. That means that almost all its European operations function without significant exports to the dollar zone. Like the other investments we detailed here, France Telecom is reasonably priced at about 13.5 times earnings, with profits expected to increase about 6% in euro terms this year. And with the euro's continued advance, its profits in dollar terms will advance at an even higher rate.
When it comes to protecting your money from the wild Wall Street swings that President Sarkozy described, it's clear that you can do a lot worse than buying a few choice French stocks. Perhaps you'll even want to sing "La Marseillaise" as you trade.
News and Related Story Links:
- Money Morning News:
Sarkozy Tells France to Embrace Globalization – But in a "French Way."
- Money Morning Economic Analysis:
Europeans Won't Euthanize Corporate Stupidity.
- Money Morning Investment Analysis:
Sarkozy Engineers Investment Opportunity – For Airbus and For U.S. Investors.
'Alliance is strong,' French leader tells Congress.