CAC 40 has underperformed compared to other major global indices, achieving only 1% growth amid challenges faced by luxury brands. However, UBS WM offers a more optimistic view of France’s economic outlook, highlighting support from the ECB, lower debt burdens, and a diverse investor base. While political risks persist, improvements in Europe’s stability and potential rebounds in the luxury sector, driven by demand in China and the Middle East, could enhance market performance moving forward.
CAC 40’s Performance: A Comparative Analysis
The CAC 40 has struggled to keep pace with other leading global stock indices over the past year, recording a modest gain of just 1% for the Paris stock market. In contrast, eurozone stocks, as represented by the Euro Stoxx 50 index, surged by 12%, while the German DAX index climbed 23%. Additionally, the Tokyo stock exchange saw a 16% rise, and the Nasdaq 100, which is heavily weighted with technology and growth stocks from the United States, experienced an impressive 30% increase. This significant underperformance of the CAC 40 in 2024 can be attributed to the challenges faced by major luxury and cosmetics brands within the index, including LVMH, Kering, and L’Oréal, alongside rising political risk perceptions in France.
Shifting Perspectives on France’s Economic Outlook
Despite these challenges, UBS WM, a Swiss wealth management firm, suggests that concerns regarding France’s economic situation should be viewed in a broader context. Although Moody’s downgraded its rating on December 14, UBS WM emphasizes that this decision reflects an acknowledgment of current realities rather than a drastic decline in the country’s economic fundamentals. The anticipated public deficit for this year is projected to be around 6%, and while the political climate may complicate efforts to reduce this deficit significantly, the overall outlook for France may not be as dire as some might think.
Support from the European Central Bank (ECB) is expected to bolster growth in both France and Europe. Investors continue to show confidence in the French economy. The decline in global bond yields has positively impacted France, even amid elevated risk premiums. Additionally, France’s debt burden is considerably lower, representing 3.5% of public revenues, compared to Italy’s 8% and the United States’ 13%. Furthermore, UBS WM anticipates that the ECB will lower its key rates by one percentage point this year, a move that should stimulate economic growth and exert downward pressure on government bond yields.
By mid-2024, the diverse investor base supporting French debt—including the Banque de France, local investors, banks, insurers, non-French central banks, and pension funds—reflects a strong confidence in the French economy, characterized by its predictability, regularity, and transparency.
While the CAC 40 may be vulnerable to political risks, there are reasons for optimism regarding Europe’s economic future. Despite concerns about a potential trade war ignited by Donald Trump, which could impact Europe and China, positive developments such as a more stable German coalition and advancements in negotiations between Moscow and Kiev regarding the Ukraine conflict could bolster confidence. Although political uncertainty may introduce some volatility for the CAC 40, the performance of eurozone stocks is likely to be driven more by fundamental factors, such as growth and corporate profitability, rather than solely by French political dynamics. Notably, the European stock market appears relatively undervalued, even if profits for eurozone-listed companies are projected to recover gradually this year.
Looking ahead, will luxury powerhouses like LVMH, Kering, and L’Oréal regain their footing in the stock market? While these companies contributed to the CAC 40’s struggles last year, some fund managers, including Edmond de Rothschild, believe the luxury sector may have already experienced its downturn. Optimism is fueled by expectations of stronger economic stimulus measures in China, a critical market for luxury goods. Additionally, DNB AM points to robust demand from clients in the Middle East and the United States, suggesting that there is still potential for price appreciation among the luxury giants in the CAC 40, with financial analysts indicating that these stocks may have room to reach their fair valuation targets.