A number of investors, who earlier beefed up their French market holdings, are now sitting back to wait out the results of the April/May presidential elections in France.
In the first quarter, France's market galloped ahead to become the world's best performing developed stock market. In U.S. dollar terms, the Morgan Stanley Capital International index for France jumped 12.53%; that was far and away better than the 4.1% rise in the MSCI index for Germany, and hardly comparable with the feeble 1.94% gain in MSCI's Europe Australasia Far East index.
Behind France's revival was the widespread switch from industrial/cyclical stocks to consumer-oriented issues. That pattern drew money from markets such as Germany's, with its large weightings in industrial/capital stocks, and moved it into France's, for its breadth of consumer stocks.
But now the reality - especially the uncertainty - of the French elections is setting in. Although many investors expect a conservative candidate to win - and Gaullist Jacques Chirac is now favored in the polls - shifting sentiment has been fueling uncertainty. For a while Prime Minister Edouard Balladur was in the lead.
Of the nine presidential candidates, the front-runners are Paris Mayor Chirac and Prime Minister Balladur, both Gaullists, and Socialist candidate Lionel Jospin.
Disenchantment with Socialist programs has boosted the campaigns of the Gaullists. But although observers say the views of Messrs. Chirac and Balladur don't differ sharply, some distinctions are apparent.
Between Messrs. Chirac and Balladur, "Chirac is the more populist," according to Christian Albuisson, investment manager of Edinburgh Fund Managers, Edinburgh. Mr. Albuisson said Mr. Chirac is perceived to have a more aggressive program to cut unemployment and is even talking about the government giving cash grants to companies that hire the long-term unemployed.
It's still unclear which candidate will win. Part of the uncertainty lies with France's two-phase voting arrangement. While the first broad balloting takes place April 23, a run-off election - between the top two vote-getters in the first round - will occur May 7. But the winner of the first balloting isn't guaranteed victory in the second round - especially if losers in the first round throw their support to the second-place candidate.
For these and other reasons, some investors are waiting out the elections before altering their positions in France.
"Over the course of the year, I think there is still potential for (added gains in the French stock market), but there is some reluctance to move further into the market" now, sums up Gwenda Jenkins, investment manager with WorldInvest Ltd., London.
In 1994's fourth quarter, her firm bought French stocks in part to expand its holdings of consumer stocks. "My feeling now is that we had a good move in that area. I am happy with the stocks I hold, but I am unlikely to add to" these previous gainers, said Ms. Jenkins. "What we are reviewing - which is now just in discussion - are some sectors in Europe" where the stock prices "have fallen dramatically," she said. One example: financial company stocks.
About three weeks ago, London-based Seligman Henderson Co. did some buying of the stocks of French banks. That edged up Seligman Henderson's weighting in France by 100 basis points to 7.5%. Although investing in French banks seemed "brave" to Chief Investment Officer Iain Clark, "we felt that a lot of the bad news had already come out" about organizations in the sector. "And bank stocks were near their lows," he said. Seligman Henderson won't be buying any more French stocks for now, said Mr. Clark.
Guinness Flight Global Asset Management Ltd., London, is also happy with its holdings in France, said European fund manager Maureen Taylor. "We wouldn't be raising the exposure from these levels," she said, pointing out the market now seems fairly valued.
Earlier this year Guinness Flight trimmed its German exposure to an underweighted position and overweighted France. "We wanted to get out of cyclicals and into consumer stocks," Ms. Taylor explained. Now, for European portfolios excluding the U.K. the firm has 30% in France, vs. 20% at the year's start.
PCM International, Short Hills, N.J., did some buying in France a few weeks ago; the firm's French exposure is now about 8% to 9% of the portfolio, said Managing Director Barry Gillman. The firm is "unlikely to make any dramatic moves going into the election," he said. And there appears to be no compelling reason to do so. "We have stocks we're comfortable with, that should benefit if" the expected outcome occurs, he said."If not, we have defensive stocks."
After the election, France's market may not quickly surge - although more gains could occur over the year, some investors said. In the near-term, investors may remain unsure of the policies of the new president.
If Mr. Chirac wins, for example, investors will be focusing on how he'll go about reducing unemployment - a centerpiece of his campaign today.
On one hand, his influence on monetary policy - lowering interest rates - would seem limited, because the Bank of France is independent. But to tinker with fiscal policy could unsettle markets.
Many foreigners will be watching what happens to the French franc. Some now believe that if Mr. Chirac were elected, he would let the franc weaken - perhaps even be devalued - against the deutsche mark as a way of stimulating the economy.
However, such a move would deviate from the current 'franc fort' policy, and it could wreak havoc on plans for a European currency.
For trade reasons, Germany already appears worried about the French franc. That was one reason, analysts said, the Bundesbank recently cut its discount rate.
On top of the uncertainty surrounding the election, some investors are awaiting the outcome of judicial investigations of a number of French companies, including Alcatel Alsthom.
Some of these investigations have focused on "the internal workings of corporations and their relationships with politicians and also individual actions by company directors who are alleged to have acted for personal benefit," said Sophie L'Helias, president of Franklin Global Investor Service, a Paris-based consultant on corporate governance and investment strategy.
The result: publicity on the investigations is "making people more careful, more aware and inclined to scrutinize their investments more thoroughly," said Ms. L'Helias.
These issues, plus election uncertainty, are creating a wait-and-see attitude in the market, she believes. On the election front, "Chirac is favored, but he could be upset." As Ms. L'Helias pointed out, Prime Minister Balladur "had been favored for months, while everyone thought Chirac should drop out. So at this point foreign investors aren't sure what they're going to get."