French stocks are back in fashion

It has been “a crazy year for the Bourse de Paris”, says Quentin Soubranne on BFM Bourse. France’s CAC 40 gained 29% in 2021, making it the world’s best performing major stockmarket. The gain is the index’s best annual performance since 1999, as a strong economic rebound and easy money from the European Central Bank (ECB) pushed it to record highs. 

The pandemic has changed the composition of CAC 40, says Bastien Bouchaud in Les Echos. Once the preserve of banks and oil companies, today the index is increasingly dominated by luxury and industrial firms. Between them the four big French fashion groups (LVMH, Hermès, L’Oréal and Kering) have generated “more than half of the index’s gains over the past two years”. Unable to travel, the world’s wealthy have been splurging on luxury goods instead. Green energy industrial firms and France’s handful of tech companies are also growing fast.  

European stocks have had mixed fortunes

Elsewhere in Europe, it was a good year for Amsterdam’s AEX (up 27.5%) and Italy’s FTSE MIB (up 23%), says Danilo Masoni on Reuters. Germany’s Dax (up 15.6%) was less impressive, while Spain’s Ibex lagged behind, managing to climb just 7.4%. The pan-European Stoxx 600 index finished up by more than 22%, its second-best showing since 2009 – although this still lagged the near-27% gain of America’s S&P 500 index. 

The big question for 2022 is whether European stocks can finally beat the S&P 500, which has delivered superior returns for most of the past decade, says Nikos Chrysoloras on Bloomberg. Strategists at Deutsche Bank and Jefferies think they might. While the US Federal Reserve is poised to start hiking interest rates soon, the ECB has indicated that it is in no hurry to do likewise. That should provide more of a cushion for European stocks, as easy money usually finds its way into markets. Valuations in Europe are also less stretched than in America. US price-to-earnings multiples are now 10% above pre-pandemic levels, but those in Europe remain 20% lower.  

Inflation risks

The outlook for the first part of the year is encouraging, says Martin Skanberg of Schroders. Eurozone corporate profits rose roughly 50% year-on-year in 2021, with companies able to protect margins by passing price rises onto consumers. The continent boasts plenty of “market leaders” in the popular green themes of “renewable fuels, electric cars or metals recycling”. The big risk is that with inflation running at 4.9% in November, the ECB may yet be forced to tighten monetary policy more quickly than expected. As elsewhere, that could spell the end of the stockmarket party.