French President Francole Hollande announced Tuesday a pro-business agenda of tax and spending cuts. The move was anticipated by many in the French financial services industry. Late last week Societe Generale put out a research note that said the expected radical changes in policy will benefit French equity markets but could hurt bonds, according to the bank’s weekly Multi Asset Snapshot publication. In early trading the CAC 40 was up over 1% on the news.
Citing a 2013 New Years speech that laid the groundwork for forthcoming changes, the research report said: “We think the French President is on the eve of implementing a policy shift as radical as that made in 2003 by German Chancellor Schroeder (re-elected in 2002) with his ‘Agenda 2010’ and French President Mitterrand’s game changer in March 1983 (Mitterrand was first elected in May 1981). We think the French government is set to implement a policy shift aimed at restoring competitiveness through improved dialogue with the employers’ union (Medef). If so, this would be a similar policy shift to that announced by François Mitterrand (elected in May 1981) during his New Year’s address on 31 December 1982 (implemented in March 1983), which led to a substantial outperformance of French bonds and equities.” (See chart below)
Will the free spending French government reduce spending?
The French bank notes that in his 2013 New Year’s speech, President Hollande made a wide-ranging group of statements that could benefit stocks. Some of the statements centered on lowered taxes and spending. “I propose a corporate responsibility pact. This is founded on a simple principle: lower labour costs and fewer business restrictions in exchange for more hiring and more social dialogue,” he said, and then the French President delivered the hook. “2014 will also be a year of tough decisions. In my eyes, three decisions are crucial. First, I want to reduce public spending. We have to save wherever possible. And I am certain we can do things better while spending less. We need to spend less to reduce our deficit but also to be able, in time, to reduce tax.”
The French government is known for heavy public sector spending and social programs. Subsidies for housing and tax breaks for parents equal 4% of the country’s gross domestic product, for instance, and the European country is currently in the grip of a resurgent baby boom generation that is stretching government resources to the limit, according to a report in the Wall Street Journal. President Hollande’s policy moves appear tied to his sinking political popularity. It is unclear the impact of reducing government spending will have on the French President’s popularity, but lowered popularity in the past has triggered policy changes that have improved popularity.
Stocks to benefit from French policy
In his New Year’s speech, the French President could be signaling an end to the significant government spending and social programs, which Societe Generale says will benefit stocks and notes bonds could lose value. The research notes (figure below) that the CAC 40 is near a low relative value point relative to the German DAX and this trend could revert back to the mean over the near term, with the CAC 40 outperforming the German stock market.