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Let's Be Franc

Although some stocks may be worth a look, fund managers and analysts say, France is a market to avoid.

June 24, 1997|CONRAD DE AENLLE | Conrad de Aenlle is a London-based freelance writer

In the last decade, societies throughout the world have forsworn the rigidity of statism for the freedom and opportunity of open markets.

And then there's France.

The French reconfirmed their love of central authority by electing a Socialist-Communist coalition last month that vowed to raise the minimum wage--already close to $10 an hour, including mandatory benefits--cut the workweek to 35 hours, and to relax the fiscal discipline required for European economic and monetary union.

Dominique Strauss-Kahn, the nation's new finance minister, didn't help reassure capital markets when he quoted Marx last weekend at the Group of 7 meeting of the leaders of major economies.

A nice place to work, maybe, but arguably not fertile ground in which to invest.

"They're stuck in the '70s," said Clark Winter, head of a New York investment fund consultancy. "I don't want to insult the French, I just wouldn't put a nickel in their market."

Some of those who had committed money in larger denominations were desperate to get it back immediately after the election, as the French stock market plunged more than 10% in just over a week. Yet it has since recovered much of that. Still, the advice of fund managers and analysts who assess investment prospects in France is that although some stocks may be worth a look, it's a market best avoided.

"The Socialist victory is bad news for the French stock market," argued Eric Chaney, who covers French economics for Morgan Stanley & Co. "Privatizations are likely to be stopped and wage costs to increase. French equities are likely to see a long period of under-performing the other Continental European markets."

He added that the new government is also likely to make it more difficult to contribute to private pension plans. Limiting this incentive to buy stocks will hurt because the French already are not big buyers of stocks. In much of the public psyche, equity investing is a virulent symbol of capitalism, a devious Anglo-Saxon plot intended to impoverish the masses and sow division in society.

The typical Frenchman will occasionally buy bonds but far more often will leave his cash in a money market fund. Starting four years ago, the government made an attempt to wean savers from this habit by privatizing several large state enterprises and selling them at knockdown prices. Unfortunately, prices were knocked down much further once trading started.

"The privatized companies' performance in France is a sore topic with most investors," observed Roger Monson, chief equity strategist at Daiwa Europe. "People look at French privatizations with a very jaundiced eye. You won't get a worse deal for your money on the rue de Rivoli."

Paris' main shopping street isn't known for giving much of a break to shoppers, especially tourists. It's been the same at the Paris Bourse, several blocks north. The CAC-40, the main index of French shares, has risen 19% this year, a respectable showing. But since December 1989, the index is up a mere 38%, versus a 150% rise in the U.S. Standard & Poor's 500 index.

Moreover, because the franc has fallen sharply against the dollar this year, the year-to-date gain for American investors is a meager 6%, compared with 21% for the S&P.

And there's a good chance the franc will fall further. The new administration is anxious to rewrite the rules under which European Union states will be eligible to merge their economies and adopt a common currency, the euro.

The fear is that Europe will end up with a "hard EMU" (economic and monetary union) without France, which could sink the franc, or a "soft EMU" with everyone, even Italy and Spain, which would probably mean a weak euro against the dollar. Either way, the dollar strengthens against the French currency. The best hope for investors is for France to drop its objections to union terms.

"It's a very one-sided bet," Monson remarked. "If everything works, you keep what you got; if it doesn't, you lose quite a bit. I wouldn't want to go to a roulette wheel with those odds."

Even without the currency threat, it's hard to make money in France. With stratospheric labor costs and taxes, protectionism and a culture that regards it as business' duty to inflate employment at the expense of profit, industrial productivity is among the lowest of any developed country. Many foreign institutions view the election result as a double negative: It confirms fears that the French, like an addict, don't just disdain the cure but need increasing amounts of what ails them.

"Not only is the Socialist program likely to be counterproductive," a report by Credit Suisse First Boston states, "but the lack of liberal reforms which France urgently needs will probably take its toll. Investors might wake up to the current euphoria with a hangover."

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