Wednesday, June 27th, 2007
The Sarkozy Factor: Time to Take a Chance on France?
By Martin Hutchinson
His name is Nicolas Sarkozy. And he’s the new president of France. He’s also the first real agent of change that this stuck-in-low-gear nation has had in decades.
For investors, the election of Nicolas Sarkozy makes it very clear that France can be transformed into a highly alluring profit opportunity. In short: It’s time to take a chance on France.
Pro-America, Pro-Markets Stance
When the dust settled on France’s presidential election in early May, Sarkozy had emerged victorious from the hard-fought campaign, with 53% of the overall vote.
And while the road to any meaningful recovery is a long one, shrewd investors understand that Sarkozy is probably the very best candidate for the job—for several reasons.
You see, Sarkozy, 52, is unique among top France politicians of the last half-century.
First and foremost, he actually likes America.
Even more important, Sarkozy understands the factors that have made the U.S. economy the innovative, resilient and dynamic market that it’s traditionally been. Sarkozy wants to imbue France with some U.S.-like qualities, hoping that will spawn innovation and risk-taking – key ingredients of any economic success story.
The man who’s known as “Sarko” to supporters and opponents alike is determined to cut away the undergrowth of over-regulation, featherbedding and especially excessive taxation.
This undergrowth has not prevented the French from being productive, but it has prevented France from using its human resources efficiently. And that’s condemned French consumers to a standard of living well below the one they otherwise could have enjoyed.
Sarkozy is clearly determined to push France toward the free-market model. Since there are so many inefficiencies in the French system, Sarkozy’s policies seem bound to produce a surge of accelerated growth.
France’s New Investor Reality
Once investors see that France is moving into a higher-growth mode, they will reward French companies with valuations more on par with those of U.S. companies, or even those of Japanese firms.
What’s more, if French companies are allowed to become more efficient, and aren’t subject to over-manning and harassment by socialist unions, they will start to generate real earnings growth of their own – even in international markets, where their newly created competitiveness will allow them to square off against rivals from the United States, Japan, China and even the emerging economies of Asia, Europe and Latin America.
Thus investors will benefit twice, once by earnings growth and again by a higher multiple placed on those earnings.
You don’t have to be a regular visitor to the I-hate-france.com Website to know that jingoist Wall Streeters and the less-inhibited U.S. politicians have spent several happy years denouncing the French financial model. They’ve penned long-and-windy dissertations that purportedly prove how much the France economy is hopelessly behind its noble rival, the United States.
Unfortunately, there’s a tiny problem with all this rhetoric.
It isn’t true.
France has had a number of economically damaging policies in place for the last decade or so, notably its 35-hour work week, and long worker vacations, all of which have condemned the country to a high level of unemployment – over 8% at the time of this investment research report.
But if you look at the long term, one thing is abundantly clear: Over the past 20 years (1986-2006), France has enjoyed a higher rate of productivity growth than the United States – 2.0% a year for France, vs. 1.7% for the U.S.A.
That fact alone should pique investor interest – even as it strikes a bit of fear in some of the companies that currently have some France-based rivals in their sector.
After all, during that entire two-decade stretch, several less-than-expert management teams ran France.
First it was the socialist Francois Mitterrand.
More recently, it was the anti-American fruitcake, Jacques Chirac.
For France to have achieved such high levels of productivity—while under the stewardship of some lousy management teams—it stands to reason that it must possess a fairly productive work force.
What will happen once all those workers are pulling in the same direction?
France could easily take on the appearance of a nation exiting a recession, shouldering aside the shackles of poor stewardship, and responding by actually improving its rate of productivity growth.
When that happens, France’s corporate profits will soar, and so will investor returns.
The “Right Stuff” at the Right Time
Sarkozy may well be the best-possible politician to lead that surge. He’s charismatic and is known as skillful speaker. He’s been involved in politics and government since he was 22. And he has personal friendships with some of the most powerful figures in the French business community.
Among those friends: French corporate chieftans, Bernard Arnault and Martin Bouygues, who were both witnesses at his marriage ceremony.
Bouygues heads the family founded The Bouygues Group, the publicly traded French industrial conglomerate with 115,000 employees worldwide. and interests in construction, telecommunications, and real estate. His company also controls TF1, the dominant French TV network.
Arnault is the chairman and CEO of LVMH Moet Hennessy Louis Vuitton SA, usualy referred to as LVMH – the publicly traded French holding company that’s generally viewed as the world’s largest luxury-goods conglomerate.
What’s more, Sarkozy’s brother, Guilliaume, is a top-level executive with the Mouvement des Enterprises de France, or MDEF, the largest union of France employers. Guilliaume Sarkozy had actually been in the running for the top union post in 2005 when he renounced his candidacy, saying he didn’t want to trip up Nicolas’ career in politics.
Institutional investors—very often the first to spot deeply undervalued companies—are stepping up their investments in companies across Europe – including in France. Over the past few months, European banks and utilities have been attracting interest from rivals in their own industries, as well as from instituational buyout firms.
With all these factors meshing, it appears that France truly is becoming an intriguing investment opportunity.
And when was the last time anyone could say that about France?
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