Nicolas Sarkozy is on the run in France after he lost the weekend’s round of preliminary voting to determine whether he’ll remain the country’s president. French stocks are on the run too. Now is the time to drill down and see what makes this market tick.
The iShares MSCI France ETF (EWQ, quote) is up 12% since the last wave of euro angst bottomed out in late November. That’s not terrible absolute performance, but it still lags both the global market and other developed economies over the same period.
And since the start of April, EWQ has been on the defensive, sliding nearly 9% over the last three weeks.
With French stocks falling another 2% this morning on news that business-friendly Sarkozy came out behind socialist candidate Francois Hollande in the first-round presidential ballot, the pressure on EWQ probably won’t let up any time soon.
Sarkozy may not be universally loved, but after four years in office he represents the status quo in France, the second-biggest member of the euro zone and as yet one of the continent’s economic bulwarks.
Should voters shift their allegiance back to socialist policies, it would represent both an unsettling policy shift and a hint that Hollande’s populist platform will unhinge the euro zone’s already-disunited front even wider.
Hollande took 28.6% of the initial vote, leaving Sarkozy with a 27.2% showing.
A socialist win would likely curtail nuclear power in uranium-hungry France, raise taxes on the country’s corporate heavyweights, and question the way the rescue of Greece has been pursued. Hollande’s anti-bank rhetoric may also weigh heavily on France’s battered banks.
Crack open EWQ, and many of its constituents are directly at risk to a Sarkozy loss.
Oil producer Total (TOT, quote) is the top holding at well over 11%, accounting for the lion’s share of the fund’s energy allocation all by itself. While there might be some pushback from tax policy, France is one of the few countries where big oil isn’t the main target on the left’s energy crosshairs, so TOT may not be in line for special treatment.
On the other hand, nuclear power is a target and leading utility GDF Suez (GDFZY, quote), which generates about 40% of its juice from nuclear sources, would have to shift course quickly if the socialists live up to their green promises.
GDFZY was already in a bearish state, down a full 24% from its October peak. As a mere 3.4% of EWQ, its losses can be absorbed into the overall fund — that’s what diversification does — but putting a traditionally defensive utility play under secular pressure is not exactly supportive if the rest of Europe swings into recession.
Between TOT and GDFZY, the EWQ portfolio is stuffed with consumer names — L’Oreal (LRLCY, quote), Danone (DANOY, quote) and LVMH (LVMUY, quote) — known the world over, as well as France’s industrial giants: drug maker Sanofi (SNY, quote), Air Liquide (AIQUY, quote) and Schneider Electric (thinly traded as SBGSF, quote).
Rounding out the Top 10 holdings list, already-listing bank BNP Paribas (BNPQY, quote) and France Telecom (FTE, quote) have each been singled out for possible attention from socialist regulation and tax policy. Their stocks are not loving these ballot results.
In general, industrial and materials producers account for a joint 23% of EWQ’s holdings. Consumer stocks are another 25% of the fund, while SNY in itself accounts for nearly all of the 11.5% healthcare allocation.
Do any of these top French corporations have what it takes to pull up the entire fund? Maybe TOT is big enough — and a big enough holding — to beat the trend, but the odds don’t look great.
Fundamentally, EWQ is not exactly cheap at 14.4 times earnings. Technically, the fund is in free fall after cracking 200-day support — now way up at $21.07 — a few weeks ago.
There’s a shot at a relief rally here, but as yet nobody seems eager to grab the knife while it’s still falling.