With a new pensions law in place, the investment climate in France is changing, despite the government’s timidity on financial reform and public opposition to planned privatisations. John Lappin reports
The historic exterior of the Paris Bourse belies the dynamism with which it is stealing a march on other markets with its plans for rapid conversion to denomination in euros, globally popular technology and comprehensive structural reforms.
The equity market is also distinctly bullish. Last year’s growth, following five years of stagnation, has continued into the first months of this year. Money is moving from money market funds, the traditional French vehicles, through bonds and into equity.
This does not represent a wholesale conversion to Anglo-Saxon ways. In conversations with French analysts, the words Gallic solution” continue to crop up. No minister is prepared to suggest the types of reforms that their German counterparts are countenancing, let alone a UK-style restructuring.
Indeed, the French governing coalition presents the curious spectacle of a landslide-winning, lame-duck government. Unions and other vested interests still have de facto powers to veto reform. These interests can have a direct impact on the fortunes of French financial institutions, some of which have been numbered among the casualties in high-profile privatisation failures.
However, many analysts believe there has been a change in direction, with the new pensions law as the obvious example. This complementary pillar promises to account for a large proportion of stock market capitalisation but with one proviso: it will take a generation to get to this point.
Monique Bourven, who has headed State Street Banque since its foundation in 1991 and has, inter alia, pioneered quant management in the French market, says that the pension law’s passage marks a very important step. This is partly because it has overcome considerable opposition, partly because it marks a significant watershed for France. In market terms, however, it will have a limited impact.
The law is one part of the puzzle in terms of changes to the investment profession. “There is a move towards the specialisation of asset management in the banks and to have sub specialities.”
On the institutional side, asset management is increasingly being delegated to outside institutions. “The trend is for external management. The market is opening up, bringing more transparency and a more professional approach to mandates,” she adds.
The euro will be a further force for change. “We will have 30% of worldwide capitalisation in the euro market. It will be a question of stock picking across countries and in general I think it will be positive for equities,” she says.
Frédéric Jolly, Président - Directeur Général of investment consultant Frank Russell in Paris, also believes that the investment culture is changing although he suggests that the pensions reform may look more revolutionary from outside France.
“It has a lot of significance for the organisation of money management companies and for their institutional marketing. From a pure new money standpoint it will be disappointing. Many French corporations have no money left to fund new pension schemes given the level of contributions to pay-as-you-go,” he says.
But asset management is changing for other reasons. “The industry is going through a restructuring process,” says Jolly, with asset managers interested in institutional business including foreign institutions in countries such as Germany and Switzerland. “They know they have to upgrade the quality of their organisation, investment processes and communication,” he says, adding that the euro will force money managers to compete on an international playing field anyway.
The major incentive however remains available returns which Jolly says are profoundly affecting asset allocation. The era of 9% short-term bond returns appears to be over. Jolly explains: “There is a comeback to more logical risk-return profiles for asset classes.”
On equity allocation, Frank Russell advises clients to hold 50% French and 50% foreign. Jolly adds that he would advise them to hold 80% foreign but that the psychology of French institutions does not allow such a shift as yet.
Dr Marie Owens Thomsen, chief economist with Paris-based Dresdner subsidiary Banque International de Placement, highlights the fact that France was one of the first countries to pioneer money market funds - worth Ffr1.2 trillion ($211bn) last year - in the 1960s. “That money is now starting to migrate,” she adds, in the first instance to the bond market. “The next cultural step is going to be to move some money into the stock market and only in the extension will they move money overseas.”
A 1% cut in interest rates in the Livret A last year caused an outflow of roughly Ffr80bn ($14bn), a good indicator for 1997. “I estimate another 10% outflow from money market accounts,” though the cultural change for institutional investors, she says, is still embryonic. “I think it will need the law to push them. They are not inclined to putmoney into equities of their own accord.”
In contrast to the subdued economic ou tlook, the French market is in favour among domestic and foreign institutions. Eric Bleines, vice president at Indosuez Asset Management, who researches French equity, says investors are “pouring in money”, in expectation of European economic growth with the added surprise of the US dollar’s upswing.
But Bleines does not regard the shift in asset allocation as a cultural change. “The less interesting yield means that on the margin they are buying equity. This helps the market very much but it is for reasons of yield rather than because of a change in mentality.”
Within the market, he says that the best performing sector for the first semester will be cyclicals, but advises investors to seek out restructuring companies. He cautions against a pure sector approach. “Last year if you held growth stocks you did well. This year, you have to be much more spread out in banks, growth stocks, cyclicals. You need a better asset allocation inside the French market than before; not a sector but a seam-based approach.”
He is optimistic about the France Telecom privatisation, due this year. On a public level, he says, it is the best-known company in France and gives high-quality service. “The public will be more eager to participate in this privatisation than any other.”
But he describes the pensions law as “a non-event”. “The good news is that a pension fund is going to be created. The bad news is that it will have no market impact. First, it is only annuities. Second, it is 65% bonds with no fiscal advantage.”
But if pensions reform proves a damp squib, other trends give Bleines reason for optimism. He welcomes an increase in lobbying by shareholders of companies that have neglected their interests and the unwinding of companies’ cross-holdings. The latter is “a win-win situation”. He adds: “When you unwind your cross-holding there are investors to buy the stock while, as a result, investors are positive about your core stock.”
Within France, the financial sector has been in the greatest state of flux. There have been notable mergers and buyouts but also failed privatisations. The reasons for these changes are diverse but, explains Jean-Marie Baudouin, general manager of Tocqueville Holdings, the main cause of the sector’s vulnerability is the property market crash of the 1990s, which caught out the many Paris-based commercial banks and insurance companies.
Problems at home have meant that no French institution has made a Deutsche Bank-style entrance into the UK market. Many analysts blame a failure in strategy as well as a lack of money, but Baudouin points to a fundamental cultural difference. Whatever the reason, significant change has only come in the domestic market.
Taking the Suez Group as an example, Baudouin says that in 1996 it had to post Ffr2.6bn ($457m) in provisions against bad debts despite confident assertions the previous year that all obligations had been met. The final outcome sums up the current strengths and weaknesses of French institutions. The Suez Group sold Banque Indosuez to Crédit Agricole, a domestically oriented mutual bank of the type that had avoided property speculation.
The ongoing reverse buy-out of Axa by UAP is a merger due to less obviously French reasons. Baudouin explains: “It is a friendly operation that looks more like the deals you see in the Anglo-Saxon world. Surprisingly there was no big reaction from the trade unions.” Other cases display more “Gallic” characteristics.
Last year saw the failure to privatise the CIC group, a large group of regional banks in varying degrees of difficulty owned by state-owned insurer GAN. The sale was opposed by an alliance of local authorities, mayors, MPs, local businessmen and trade unions, angered by the prospect of centralisation, a particular French bugbear.
Similar vehemence foiled the privatisation of defence and consumer electronics giant Thomson, particularly plans to sell the electronics arm to Korean company Daewoo but it was the government that doomed the sale by failing to follow its own privatisation procedures.
France Telecom is to be privatised in May, from which the government hopes to raise Ffr25bn ($2.7bn) in a public offering. Unions and the largely unreconstructed Socialist party - which also opposes the pensions law - provide the opposition. Opponents suggest that the sale would remove a valuable revenue source, forcing tax increases, although Baudouin is sceptical. He points out a more likely pitfall: that Telecom employees, who enjoy civil service status, will portray any erosion of their rights as the beginning of a trend for the civil service as a whole.
Nevertheless success seems guaranteed, given the quality of the company and the fact that the privatisation co-incides with the redemption of the Emprunt Balladur, a popular government bond, making funds available to potential investors.
France has clearly failed to establish a consensus for reform. The government’s present mandate is based more on the unpopularity of the Socialists in Mitterrand’s twilight years than on its own programme. It knows the direction it wants to take but is often unable to do so. When it does act, legislation is watered down by endless committees or strike threats.
There is some optimism within the investment community about a change in direction, with moves by the exchange, the industry itself and some French companies to meet the challenges of a single currency area and it would take staggering incompetence to botch the privatisation of a successful national telecom company. Market prospects are bright. But the vociferous French public, facing a slow recovery from deep recession, remains unconvinced of the virtues of further privatisations and pensions reform.