Macron has failed France – but there is still plenty to invest in

“To conquer without risk is to triumph without glory,” as Pierre Corneille wrote in his classic tragicomedy Le Cid. Thus on Sunday, Emmanuel Macron won the French presidential election without any glory.

The elections themselves have lost their traditional spark and sense of jousting. The final debate between Macron and Marine Le Pen was a debate between technical managers without a grand vision for France. Both want to write cheques that France can’t cash. And this second-round match up was simply what had been anticipated for years, despite brief bursts of speculation that another candidate – Éric Zemmour (far-right), Valérie Pécresse (centrist) or even Jean-Luc Mélenchon (far-left) – might edge out Le Pen.

Still, the elections brought some surprises. First, the anti-establishment parties represented by Melenchon, Zemmour and Le Pen have become mainstream, gathering more than half of voters who are extremely dissatisfied. The causes of their miscontent range from a loss of social identity to dwindling purchasing power, and from heavy taxation to management of the Covid-19 crisis. When I met Marine Le Pen last December in Warsaw, she presented herself more as a classic left-wing candidate than a representative of the right. She left the topic of migration and identity to Zemmour. She vowed to protect the French working class against globalisation and to focus on purchasing power. This was a good intuition, allowing her to be in the second round once again and to increase her share of the vote from 33.9% in 2017 to 41.5% now.

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Hence an alternative view of the presidential elections is that three left parties have gathered three-quarters of voters in the first round: Le Pen (23.2%), Melenchon (22%) and Macron (27.9%) – it should not be forgotten that he was finance minister under leftist president François Hollande before creating his own movement to run for president in 2017. Un carnage a trois. Can le déclin français ever be stopped?

Two decades of decline

In the mid 1990s, French industry was able to compete against German industry, while Paris was battling with London to be the financial hub of Europe. But France was unable to reform its social system: wide-ranging strikes and protests in 1995 forced prime minister Alain Juppé to abandon his proposed reforms. Today, social spending represents a record 31% of GDP (the comparable figure for the UK and for the OECD average is around 20%), of which half is represented by pensions. It’s a world record and “a crazy amount of dough”, as Macron pointed out.

The traditional strengths of France – mainly its infrastructure, a few multinational large-cap companies and its agriculture sector, have weakened significantly. The pandemic and recent scandals related to care homes have highlighted the weaknesses of the healthcare system. In education, France has plunged steadily in the OECD’s programme for international student assessment (Pisa) ranking, because the education system promotes equality and rejects selection, which aligns pupils with the weakest. French teachers are reportedly surprised by the relative excellent level of maths among Ukrainian refugees. This does not bode well for the future of the nation. The justice system is short of funds… one could go on. Considering this lack of investments in key sectors, one wonders what the heavy level of taxation is for.

The euro worsens France’s lack of competitiveness, because it is unable to devalue its currency. The euro was tailored for the German economy while the “Club Med” economies (Greece, Italy, Spain, and indeed France) were pacified with excessively low interest rates. The French economy is now in the second league – its industry is struggling to compete with rejuvenated Spain and rising Eastern Europe. Industry represents 16.5% of GDP, even less than in the UK (17% of GDP), despite the fact that the latter is often presented as the country with no remaining industry.

Macron failed to deliver

Back in 2017, Macron consciously aspired to be a “Jupiterian” president – an aloof figure with god-like powers to reform France. An inexperienced parliament voted at his command, approving laws often late at night once most MPs were home. Most ministers remained unknown, except the ones caught in some scandals. But despite promising to be a revolutionary, he turns out to be more of a management consultant, mainly concerned with his image and enjoying his power.

Admittedly, he faced some challenges: the gilets jaunes protest movement, the pandemic (although this allowed him to present himself as a war leader) and now Russia’s invasion of Ukraine. And to be fair, he initially took some good decisions. He maintained the crédit d’impôt pour la compétitivité et l’emploi (CICE), a tax credit to promote competitiveness and employment introduced by his hapless predecessor Hollande. He capped capital gains tax at 30% and reduced corporation tax from 33.3% to 25%. These reforms were highly necessary. Other taxes such as the contribution sociale généralisée (CSG), to fund the welfare system, and green taxes were increased.

Pre-pandemic economic growth was close to 2% per year on average, slightly above its average since 2000. GDP is also expected to recover its pre-pandemic levels this first half of the year. GDP growth this year is expected to be 2.9%, in line with the eurozone, although falling to its long-term trend of 1.4% in 2023. Unemployment decreased from 9.4% to 7.6%. Even now, inflation remains relatively contained compared with the rest of Europe at 4.5% because some energy and electricity prices are capped. Purchasing power – the theme at the core of the election – actually increased annually by 1% over the past five years for those in the bottom decile, according to the OECD.

Macron has also encouraged entrepreneurship and hubs of innovation, under the flag “start-up nation”. A €10bn public fund was created to finance disruptive innovation. French tech firms raised €4.8bn during the first quarter of 2022. However, Paris has failed to attract financial businesses from the UK after Brexit. Companies prefer to list in Amsterdam, for example.

A country addicted to public spending

Macron’s slight reduction in taxation was unfunded. He was unable to curb public spending that passed 60% of GDP as the budget deficit exploded to 6.9% in 2021. Some of this relates to exceptional expenses during the pandemic, but indebtedness is spiralling out of control to €2.8trn or 113% of GDP (a total rise of €700bn during Macron’s presidency). France is addicted to public spending: the last time the country achieved a budget surplus was 1974. Back in that era, former president Valéry Giscard D’Estaing declared that if public spending reached 40% of GDP, the country could be considered socialist – it is far beyond that now. Debt and taxes are excessive and weigh significantly on the competitiveness of companies.

The trade deficit has increased to €85bn per year as France exports less and less: car production has more than halved over the past 20 years. From being a strong exporter in the nineties, France has not been able to record a trade surplus since 2005, and the trend is alarming. (The deficit is expected to exceed €100bn this year, partly due to higher commodity prices.) It has even become a net importer of food, other than spirits and wine). An agriculture sector crushed under heavy regulations and taxation cannot compete with imports. Of that €85bn deficit, €57bn results from trade within the eurozone, telling us that a lack of competitiveness with neighbours is to blame, rather than China or energy imports. The deficit with Germany exceeds €30bn, nearly twice the one with China, showing how Germany has been able to profit from naivety regarding the French-German relationship. France’s overall current account deficit that includes both goods and services reached €25.8bn last year.

More worryingly, corporate indebtedness shows no sign of decrease at 82% of GDP. This compares to 51% in Germany or 59% in the UK, and makes companies more vulnerable in a potential economic downturn led by high commodity prices. The European Central Bank (ECB) is under pressure to normalise interest rates as inflation is surging – producer price inflation (PPI) in Germany reached a staggering 30% in March – which would increase finance costs. This comes at a time when the risks of a full embargo or halt on Russian oil and gas is rising, which could push oil prices to $185 per barrel, reckons JP Morgan. That would put further pressure on corporate margins.

Another hit from Russia

Despite this, the French stockmarket has done better than you might think. Over the past five years, the CAC 40 index increased by 25%, twice the gain in the Dax 30, while the FTSE 100 remains flat. However, some long-standing French champions such as Renault are facing strong headwinds. Renault went through a number of crises over the past five years and is now at the point where its market capitalisation is smaller than the value of its stake in Nissan. To make matters far worse, its second-largest market after France is Russia. Or more accurately, it was Russia: Renault will offload its 68% stake in Avtovaz, maker of the Lada, for a symbolic €1. More painful than the immediate loss is the cost in terms of future economy of scale that has helped support the remarkable success of its Dacia division (Dacia-derived models are made and sold in Russia) and may weigh on its alliance with Nissan.

Renault is not alone. Many French companies have already made provisions for billions of euros in losses regarding their activities in Russia. It is unfortunate that finance minister Bruno Le Maire, who declared all-out economic and financial war on Russia in February, encouraged French companies to invest in Russia at the start of Macron’s term. Circumstances have changed, but it illustrates how French politicians lack vision (British politicians have, of course, performed the same shameless and unacknowledged about-turn). Now Auchan, Decathlon, LVMH, Société Générale and Total are all under pressure to close or give away their activities in Russia. One wonders who is punished the most by these sanctions.

Priorities for a second term

Macron can claim that he has once again saved democracy by beating Le Pen, but his programme is uninspiring even compared with 2017. Measures to improve women’s health, end the TV licence and tackle online harassment will not change France. There will be €15bn in annual tax cuts – not appreciated by local authorities that see their incomes cut (reduced council tax and territorial economic contribution paid by corporations). Some €35bn will be spent on key sectors such as the army, education and justice. Despite these expenses and an anticipated increase in interest rates (and thus debt-servicing costs), the public deficit is somehow expected to be less than 3% of GDP in 2027.

The most interesting points of his programme are the environment, agriculture and clean energy, especially offshore wind energy and nuclear energy. He has also vowed to adjust the European Commission’s “Farm to Fork” food strategy, which was set to reduce agricultural production by 13%.

Above all, Macron must reform the pension system. The essential task of postponing the retirement age to 65 is supported by his electoral base even though they are older and closer to retirement. However, he must be wary not to exacerbate the social divide with some of his calculated provocations. One part of France is thriving with globalisation – pensioners, inhabitants of metropoles (urban areas) and large parts of the public sector. The other part – the young and the rural – is marginalised. Thus 60% of the young supported Le Pen, while 70% of pensioners supported Macron.

Elections to the National Assembly (the lower house of parliament), which are often called the third round of the presidential elections, are due in June. However, they may be brought forward to maintain Macron’s momentum. The outcome is uncertain – he may not have a majority. The identity of the prime minister – who is appointed by the president but must have the support of the National Assembly – is anyone’s guess. Macron may have to deal with a strong left that would block pension reform. Conversely, the right-wing Les Républicains may do well despite the humiliation of their candidate Pécresse, (who won just 4.79%) and could support Macron’s proposals.

The best of the CAC 40 and beyond

Defence companies Thales (Paris: HO) and Dassault (Paris: DSY) have seen their shares rise dramatically this year and the shares are now pricey. The world is investing heavily in weaponry, but Nato countries that plan to increase spending, such as Germany and Poland, tend to buy American fighters or weapons rather than French. Mining and metals firm Eramet (Paris: ERA), long seen as struggling, has also seen its value nearly double since the beginning of the year thanks to the commodity boom.

Clean energy is probably a better place to look. Notwithstanding Renault’s (Paris: RNO) Russian disaster, note that the firm plans to spin off its electric arm (like Volvo with Polestar) in the hope of achieving a Tesla-like valuation. Furthermore, Macron promised more subsidies for the leasing of electric cars. That could benefit leasing company ALD (Paris: ALD). Renewable energy firms Volatalia (Paris: VLTSA) and Neoen (Paris: Neoen) will benefit from increased investment in the sector.

Macron has also emphasised energy preservation and house insulation. That will favour a company such as Rexel (Paris: RXL), which distributes a wide range of equipment, including renewable energy and energy efficiency products. It looks cheap on an enterprise value/earnings before interest, tax, depreciation and amortisation (EV/Ebitda) of 7.5.

Oil major Total remains cheap because of its exposure to Russia. Being forced to hand over its assets would be extremely costly. I prefer Vallourec (Paris: VK), which provides pipes for the oil business and is down significantly over the last two years. Also consider CGG (Paris: CGG), which does seismic surveying for oil explorers, as well as oil firm Maurel et Prom (Paris: MAU), which is focused on exploration.

Luxury goods firms such as LVMH (Paris: MC) and Hermès (Paris: RMS) benefit from the global rise in inequality. They are among the largest listed French companies, along with beauty giant L’Oréal (Paris: OR). The sector remains strong and LVMH reported record sales of €62bn in 2021. That said, it’s not obviously cheap: its smaller peer Kering (Paris: KER) is valued at a more attractive ratio.

Strong food brands are able to transfer inflationary pressure to customers to preserve their margins. Danone (Paris: BN) has delivered many disappointing years but looks attractive now on an EV/Ebitda ratio of ten. Fleury Michon (Paris: ALFLE), a specialist in meats and ready meals, is on an EV/Ebitda of five.

Healthcare and pharmaceuticals are a key sector: packaged medicines represent 6% of French global exports. Many medical tests and treatments have been postponed due to lockdowns and the focus on Covid-19. Guerbet (Paris: GBT), which makes contrast agents used in medical imaging, could benefit from a rebound in screening, as could diagnostics firm Eurobio Scientific (Paris: ALERS). Clinical-stage biotech firm Acticor Biotech (Paris: ALACT), which focuses on treatment of thrombotic diseases, is also an interesting one to watch.