Institutional investors cheered the election of Jacques Chirac as France's new president, believing equities will benefit from his expected policies and administration.
Mr. Chirac, the Gaullist mayor of Paris, beat Socialist Lionel Jospin in the May 7 runoff election.
To many observers, Mr. Chirac's victory signaled a heavier emphasis on domestic matters - and above all, a drive to slash France's 12.2% unemployment rate. The specific measures adopted will be a key to the French stock market's path. But if short-term gains are any sign, investors clearly were pleased. Between the close of trading May 5 and May 9, the French stock market jumped 3.2% in local currency terms.
"You've got to view the election as good for the French stock market," said Michael Perelstein, international investment director of MacKay-Shields Financial, New York.
Among the signs of bullishness:
MacKay-Shields is holding its overweighted position in France, and is not looking to sell; if anything, it's looking for opportunities to buy more French stock down the road.
Lombard Odier International Portfolio Management Ltd., London, and The Boston Co., Boston, will "hold" their overweighted positions in the French market.
Bailard, Biehl & Kaiser, San Mateo, Calif., expects to increase its French exposure; and Pictet International Management Ltd., London, would be looking to increase its French market weighting from neutral to overweighted in the "medium term."
For investors, one result of the French elections is clear: Mr. Chirac favors higher economic growth to combat unemployment. That should spur corporate profits and the French market.
But just how the Chirac government will tackle unemployment remains a worrisome question. The problem for some investors is the lack of clarity and specifics voiced by Mr. Chirac during the race. Worse, some of Mr. Chirac's perceived intentions could be contradictory.
"Mr. Chirac pledged to reduce unemployment in France, but ..... he also said he would maintain the French franc's link to the deutsche mark and would try to fulfill the objectives of the Maastricht treaty for monetary union by 1999, so the two (thrusts) don't add up," said Christian Simond, senior investment manager with Pictet London U.K. Ltd., part of Pictet International Management. French fiscal policy "has been loose until now because of the tight monetary policy" used to maintain the "franc fort" - strong currency - policy, he said.
"If (France wants) to maintain that policy" while trying to ease unemployment, fiscal policy would have to loosen further. But that could expand the federal budget deficit, now at just more than 6% of gross domestic product.
Not only would such a development concern financial markets, it also would violate a provision of the Maastricht treaty. To comply with Maastricht, France needs to cut its budget deficit.
Mr. Simond believes investors and the public generally will get a clearer sense of Mr. Chirac's policies when he chooses his prime minister, most likely early this week. The prime minister then will pick a cabinet with the ultimate approval of Mr. Chirac.
But Mr. Simond first expects France's central bank to cut interest rates, partly under pressure from Mr. Chirac's government and partly because inflation remains under control. In turn, the French government, which controls the franc's rate, is expected to alter its currency policy. Many expect the new government to switch to a stable policy and let the franc weaken while still remaining within the allowable bands of the European rate mechanism.
Lower interest rates should help spur economic growth, while a weaker franc should boost exports.
In turn, job creation measures should be outlined in a mini-budget due out by mid-July. Although it's too soon to know what that budget will contain, many expect it to include at least some of the ideas Mr. Chirac voiced during the campaign. For instance, analysts say the new president supports giving companies financial incentives to hire young people and the long-term unemployed. While such moves would further drain federal coffers, Mr. Chirac has talked of raising the value-added tax as a way to help offset government spending on unemployment.
The new president also has talked of boosting spending for public works projects and for lower-income housing. And he's likely "to try to revive the property market," whose downturn led to problems "for financial institutions, including Credit Lyonnais," said Pictet's Mr. Simond.
Richard Gilhooly, international bond strategist with Paribas Capital Markets in New York, sees the Chirac presidency as boding well for stocks and the short end of the fixed-income market. But the new government's policies and views should weaken the franc and depress longer-term French bonds.
"Exposure to the French franc would hurt overseas investors if the franc were allowed to fall," said Mr. Gilhooly. "If the franc fell by (say) 5% over three to four weeks, it could outweigh the benefits of being in the stock market."
Therefore, international investors would need protective measures in France. While Paribas would recommend being "exposed to the short end of the bond market and to the stock market," it would suggest hedging currency exposure in francs, the strategist said.
Investors themselves had differing strategies for France. Among those inclined to buy is Bailard, Biehl & Kaiser. The firm now has a 7% weighting in that market, vs. an 8% benchmark; it would like to boost its French market weighting above the benchmark level, said Conrad Metz, senior vice president.
Lombard Odier International was "naturally happy that Mr. Chirac won the election," said Ronald Armist, head of equities. But the firm doesn't plan to raise its French exposure in the next couple of months. "We are overweighted in France by about 20% in traditional European portfolios. We think we should ride this (exposure) for the time being," said Mr. Armist.
Scottish Widows Investment Management Ltd., Edinburgh, Scotland, also is maintaining its "clearly overweighted position in France," said Albert Morillo, the firm's head of European equities. He believes the market represents good value. But the market's post-election jump didn't make sense to him, especially since "the smart money is in the (French) market already."
Back in the United States, The Boston Co. has been overweighted in the French market since late last year, with a 7% to 8% exposure in broad non-U.S. stock portfolios. "We like our current weighting and we'll probably stay there," said Sandor Cseh, senior vice president. "But if there is a huge run-up in the market later this year, we'll probably cut back."