My Money Morning colleague, Keith Fitzgerald, is a great believer that the best way to play China’s explosive growth is to invest in companies that are making money FROM China. Well guess what – not all of those companies are American. French President Nicolas Sarkozy was in Beijing this week, and signed $30 billion worth of contracts for French companies.

What he probably didn’t realize was that he was also creating some very interesting investment opportunities.

France and China are – let’s face it – natural buddies. France has always traditionally looked to a political counterweight to the United States, and China is beginning to provide one. China wants to keep the European Union from aligning against it in the United Nations and elsewhere, and from imposing anti-dumping duties on its goods, and France is the EU’s guiding spirit – even if it’s no longer its largest economy.

France has strengths in some high-tech, heavy industry sectors that China needs. And it also boasts the world’s most-sophisticated array of luxury goods – haute couture and haute cuisine – that newly wealthy China consumers now crave.

China, on the other hand, has cheap consumer goods that don’t compete directly with French-made products, which means France can allow China to sell  them in the European market with no fear of lost market share. Indeed, France will even promote the benefits of trade to EU consumers, so long as it sees a good amount of trade going back the other way.

Clearly, the two companies compete very little, meaning they have many avenues for cooperation.  Still, while Chinese products represent 5.8% of French imports, China could buy more from France, which represents only 1.4% of Chinese imports.

The $30 billion worth of deals Sarkozy helped negotiate with China may help shift that balance somewhat back in France’s favor. It basically consists of three major French contracts:

• First, Areva, the world’s largest builder of nuclear power plant reactors, is to build two new reactors in conjunction with China Guangdong Nuclear Power Group. The sale, which totals $12 billion, also includes a 10-year agreement to buy uranium from UraMin Inc., a uranium producer owned by Areva. Regrettably, you can’t buy Areva directly; it’s owned entirely by the French government. A planned privatization in 2005 was called off, but it’s thought the deal may return next year. However, don’t despair: In a typical French compromise, the company has issued investment certificates, which have all the rights of ordinary shares except the right to vote – listed on Euronext and – through the Pink Sheets – on the U.S. over-the-counter market (ARVCF.PK). As a U.S. retail investor, you probably don’t want to vote in a French company election anyway, but the company is pretty expensive at about 42 times trailing earnings.

• The second big French deal that Sarkozy closed [listen, you really can't beat a French salesman when he's on song, and plying the client with really first class champagne!], is a sale of 160 commercial passenger jets (110 A320s and 50 A330s) by chief Boeing Co. (BA) nemesis Airbus Industrie SAS, in a deal totaling $15 billion. When French charm and natural geopolitical alliance come together, it doesn’t matter that the euro is hugely overvalued against the dollar at $1.50. Airbus is a unit of the Franco-German defense-aerospace giant EADS NV (again, listed on Pink Sheets (EADSF.PK)). Unfortunately EADS’ Price/Earnings ratio is infinite, as the company is currently operating at a loss. Maybe that one’s not such a hot investment opportunity.

• The third big deal Sarkozy closed [busy day!] was for the telecom giant Alcatel-Lucent (ALU), which signed $1.1 billion of contracts to expand the mobile networks of China Mobile Ltd. (CHL) and China Unicom Ltd. (CHU). The Alcatel shares are rather more worth buying at only 12 times prospective earnings; Alcatel-Lucent is pretty much a blue chip and its China deals, while smaller than those of Areva and Airbus, give every sign of being solidly profitable.

Alternatively, rather than investing in the successes of Nicolas Sarkozy, master salesman, you may just want to invest in some of his principal sales tools through LVMH Moet Hennessy Louis Vuitton SA (pink sheets (LVMHF.PK)). Maybe a little pricey at 20 times earnings, but this is French quality, after all, not domestic rubbish – and you get Sarkozy’s champagne (Moet-Chandon, sans doute), his brandy (Hennessy cognac), and very likely also his Louis Vuitton briefcase!

News and Related Story Links:

• Money Morning:
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• Money Morning:
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• Money Morning:
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• Money Morning:
  Sarkozy Tells France to Embrace Globalization – But in a ‘French Way.’

• Money Morning:
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• Money Morning:
  Sarkozy Tells France to Embrace Globalization – But in a ‘French Way’

• Wikipedia:
  Nicolas Sarkozy.

• PRNewswire:
  Chinese President Hu Jintao and French President Nicolas Sarkozy Take Part in Formal Signing Ceremony for Alcatel-Lucent and Chinese Mobile Operators Frame Agreements for Mobile Networking Solutions and Services.

In an address to the U.S. Congress on Wednesday, French President Nicolas Sarkozy criticized "the vagaries and excesses of a financial capitalism that currently leaves too much room for financial speculation."  For decades, conservative Americans have relegated France to the global also-rans, condemning it as an "Old Europe" denizen with a sclerotic economy that runs in slow motion. Either they have to be wrong, or Sarkozy does – and there’s money to be made from figuring out which.

Not the French Economy of Yore

One of the great secrets here in the United States is that France’s economic performance hasn’t been that bad. Productivity growth – the key to long-term wealth and stock market profits – was 2.0% per annum in the 10-year stretch from 1996 to 2006, compared with 2.3% in the United States, according to the Groningen Group Total Economy Database.  Since those 10 years included the U.S. "productivity miracle," and the years of supposed "Eurosclerosis," it’s clear that the normally disdainful U.S. attitude toward the French economy is in need of some serious adjustment.

There are problems in the French economy, of course, just as there are problems in the U.S. market. The 35-hour workweek, introduced in 1995, has added substantially to French companies’ costs, and caused French unemployment to remain at a stubbornly high 8%. French public spending – and therefore taxation – is much higher than in the United States, at around 53% of gross domestic product (GDP), which causes a persistent budget deficit of about 3% of GDP, also higher than the United States.

The Gini index of inequality is only about 0.27 compared with 0.45 in the United States, which makes French society remarkably egalitarian, but tends to remove the incentives to entrepreneurship. On the other hand, even though France is a member of the strong-currency euro, its current account deficit is only 1.2% of GDP, far below the 5.6% deficit of the United States.

The U.S. Spec-Wreck

Given the subprime mortgage problems that U.S. financial speculation has caused – not to mention the huge write-offs the largest U.S. banks and brokerages have been forced to take – it’s not unreasonable for Sarkozy to criticize the speculative excesses of Wall Street. Close examination of the statistics indicates that these are not a necessary tradeoff for much better U.S. economic performance … they are an abnormal outgrowth of a U.S. performance that is only a little better than France’s, and that may actually have stored up significantly more dangerous problems in the years to come.

Indeed, if Sarkozy succeeds in reforming the French labor market, as he has promised to, French economic performance may even succeed in leapfrogging the U.S. performance in the years to come. Under that scenario, the newly liberated French labor market would enable that country’s economy to become more efficient, which would lower France’s unemployment rate.

From that vantage point, it makes sense for a U.S. investor to look at French stocks, if only as a modest diversification from his domestic investments and his forays into emerging Asia. So what’s out there that a U.S. investor might want to buy?

The Way to Play to Pay

First, you can buy the index. The iShares MSCI France Index (EWQ) is an exchange-traded fund (ETF) with a value of $461 million – sufficient for liquidity. It is currently trading at the French market’s price-earnings ratio (P/E) of 13.3, which is significantly below the P/E of 15.7 for the Standard & Poor’s 500 Index. With France showing no signs of imminent recession, and without the large write-offs in its financial sector, you’d probably expect the index to trade at a premium to the S&P, making this French ETF a bargain buy right now.

For a corporate investment, let’s look at the largest pharmaceutical company in Europe: Sanofi-Aventis (SNY). As a Scrooge-like investor [despite what my publisher believes, my middle name is not Ebenezer], I consider this company’s trailing P/E of 21 to be a little rich. Given the U.S. dollar’s decline against the euro, SNY’s earnings are growing quite rapidly in euro terms and very rapidly in dollar terms, so the company’s forward P/E ratio, based on its projected 2007 earnings, is only around 11 [Now that's a stock play that our dear friend Ebenezer would find alluring, indeed].
 
Another solid French buy is France Telecom (FTE), which operates both fixed and mobile telephone systems in France, Britain, Spain and Poland. That means that almost all its European operations function without significant exports to the dollar zone. Like the other investments we detailed here, France Telecom is reasonably priced at about 13.5 times earnings, with profits expected to increase about 6% in euro terms this year. And with the euro’s continued advance, its profits in dollar terms will advance at an even higher rate.

When it comes to protecting your money from the wild Wall Street swings that President Sarkozy described, it’s clear that you can do a lot worse than buying a few choice French stocks. Perhaps you’ll even want to sing "La Marseillaise" as you trade.

News and Related Story Links:

• Money Morning News:
  
  Sarkozy Tells France to Embrace Globalization – But in a "French Way."

• Money Morning Economic Analysis:
  Europeans Won’t Euthanize Corporate Stupidity.

• Money Morning Investment Analysis:
  Sarkozy Engineers Investment Opportunity – For Airbus and For U.S. Investors.

• Wikipedia:
  Nicholas Sarkozy.

• MSNBC.com:
  ‘Alliance is strong,’ French leader tells Congress.

• Wikipedia:
  Ebenezer Scrooge.

• Wikipedia:
  La Marseillaise.

By Jason Simpkins
Staff Writer

A lengthy investigation by French regulators suggests that "massive insider trading" took place at Airbus SAS parent EADS, the Associated Press reported yesterday (Wednesday). Louis Gallois, EADS Chief Executive, pointed out that the findings were preliminary. But if confirmed, it would be a devastating blow to both EADS and Airbus, the world’s second largest plane-maker.

The Financial Markets Authority (AMF) and Paris prosecutor Xaviere Simeoni are conducting separate inquiries into alleged wrongdoing by executives at both EADS and Airbus.

Judicial officials contacted by The AP said the preliminary report indicated "massive" insider trading by 21 top managers at European Aeronautic Defense & Space Co. NV, or EADS, between November 2005 and March 2006. The report referenced an announcement in March 2006 by major EADS shareholders, Lagardere SCA and DaimlerChrysler AG, that they would reduce their stakes, according to a report in the French daily, Le Figaro.

Allegedly, both groups forward-sold their shares so the sale would take place in 2007 at the 2006 share price. This suggests they anticipated share prices would fall.

The AMF is also trying to determine what executives and board members knew about profit-damaging technical problems with the A380 super-jumbo and mid-range A350 aircraft, when they sold shares or exercised stock options worth millions of euros.

Problems with the aircraft and a profit warning were publicly announced in June 2006. That sent the EADS stock price tumbling 26% in one day. According to Le Figaro, EADS joint CEO Noel Forgeard, is one of the parties that have been implicated. Forgeard and his children exercised stock options in the company at a profit of $3.2 million in March 2006, according to AMF filings.

According to the French daily, former co-chairman of EADS Arnaud Lagardere, members of EADS’ executive committee, and Airbus’ then-CEO Gustav Humbert were all aware of the problems plaguing the A380 and A350.

Airbus and EADS have struggled recently. This only adds to a growing list of troublesome issues that include dissention within the company and a strengthening euro, which has made the company’s planes (which are priced in U.S. dollars) less profitable. Airbus is already anticipating thousands of job losses and factory closures.

EADS shares fell 0.9% to 21.68 euros ($30.77) in Paris. The shares of Lagardere sank more than 6%, to 57.89 euros ($82), yesterday.