Although it is very far from the great increases on Wall Street, 2024 is not exactly a bad year for Europe. So far this year, the EuroStoxx 600 has risen a timid 6.5% in the heat of promises of rate cuts. The Ibex 35 flies with increases of more than 16%the Milan stock market rose 13% and even the German stock market, whose economy is facing recession and stagnation, rose sharply by 14.5%. In this context in which European equities seem to be going through a great moment, one of their greatest supporters has been left behind. The Paris stock market is trading negatively with drops of 2%, following a totally different path than its peers.
In that sense, while investors around the world, watching with vertigo the rises of Wall Street, have looked to the old continent in search of a settled but less overheated market, a perfect storm has settled on the French stock market. The year did not start badly for the French titles, which they revalued by 9% to its August highs. At the time, Paris held the world’s most expensive stock market crown, a title that has endured subsequent declines since London. Since the fifth month of the year reached its maximum, it has fallen by 10% and clearly entered negative territory.
It all started in summer. At that time, three major problems were revealed in their maximum intensity that have swamped the index that was destined to reign in Europe with the reductions in rates and the fragile situation in Germany. And it is not only that three problems have arisen, but that its great strengths have since then and over the months become the Achilles Heel of one of the few selective among the greats, preventing this market from reaching the potential it many expected.
The collapse of luxury
The probably decisive factor due to its importance. Only LVMH (parent of Louis Vuitton) represents 10% of the entire index and Hermes 3.73%, Kering 1.3% and L’Oreal 5%. Adding to Pernod Ricard (1.57%) we are saying that only this select group represents a quarter of the entire index. And although these companies filled the index with euphoria both last year and at the beginning of this year, the reality is that they are in an extreme situation.
This sector, which traditionally represents an unbreakable shield in times of crisis (since the wealthiest do not usually give up purchases of this type) has found that demand has paralyzed and that has taken away their great weapon to maintain profitability. , price control. Although prices have risen 22% since 2019 In the sector (according to Bain & Company), KPMG explains that there is already a “natural limit” that is “discouraging consumption” around the world.
However the main front is ChinaAccording to Bernstein’s forecasts, for all these firms, the Asian giant is their main market. Today it already accounts for 35% of Gucci’s sales, 27% of Louis Vuitton’s and 26% of Hermès’. However, the key is to grow at a rate of 4.7% or, at least, that is what analysts thought until now.
Since before the summer, sales in China have been falling as the country’s economy It does not grow as expected. The stimuli promised from Beijing could change this reality but, for now, they have not landed and the profits of these companies remain under siege. This was seen, for example, in LVMH’s third quarter results, published in October and which showed a 3% drop in revenue, mainly weighed down by China.
From HSBC they expect a general blow. “As a result (of Chinese poor performance) we reduce our estimates“We no longer expect a return to double-digit growth in the third or fourth quarter of 2024, and this despite the fact that we have a much simpler basis for comparison.”
This has led to these companies having a very negative performance. LVMH has been one of the most determining factors with a drop of 17.8% which, given its large size, represents a devastating blow for the whole. Also Kering, which plummeted by 43%, L’Oreal by 23% and Pernod Ricard by 28%. YesThe luxury handbag firm Hermes only offers relief on this front. which, despite the dynamics of the sector, has rebelled with a 7% increase in 2024 thanks to its lower dependence on China and greater presence in other markets such as the US. However, the reality is that the sector is being the great burden.
industrial coup
For its part, France is, along with Germany, one of the most affected countries in the EU in its industrial sector. This has weighed down some of the figures who could turn the situation around. Highlighting Stellantisthe automobile group behind Renault, Chrysler and Fiat, which is one of those that is suffering the most from the motor crisis.
In fact, this firm has dropped nearly 41% so far this year due to higher costs, demand weakened by high interest rates and high competition from cheaper Chinese models are being poison. The rest of the industry also pales in Cac 40 where only the factories dedicated to Defense such as Safran or Thaleswhich are experiencing a resurgence due to the rearmament of Europe.
However, returning to the specific case of Stellantis, the crisis in the sector has been felt especially in its latest results, in which a drop of 27% has been seen in your income. Morgan Stanley commented in its latest report about the company that is on the verge of a “long cycle” of negative margins due to expectations that were too high for 2025 and 2026.
Beyond cars, the latest PMIs published by S&P Global relating to French industrial activity make the problem clear. This November, factory production fell at the fastest rate in nine months. The general purchasing index stood at 44.5 points (50 points mark growth or contraction). “The French manufacturing sector remains in a deep crisis,” said Dr. Tariq Kamal Chaudhry, economist at Hamburg Commercial Bank. “The outlook remains bleak and there are no signs of an upward trend on the horizon.”
The big ‘victorious’ bank… deactivated
However, where France should compensate for these problems is thanks to its financial sector, one of the most powerful in Europe. Its main banks and insurance companies are some of the largest on the continent. BNP Paribas, Crédit Agricole, Société Générale, Axa…However there are two problems. The first is that the weight of these giants is very small in the global calculation of the index, with 9.55% of it. That is, it represents less than half of the battered luxury.
Aside from the question of size itself, the increases in its financial sector have lagged far behind those of its peers in the rest of the continent, particularly in southern Europe. The paradigmatic example is Spain where not only the financial sector represents more than 30% of the total weighting of the Ibex 35, but it has shot up 28% so far this year compared to the scarce 8.5% of its clear counterparts.
The reason behind the drag on the sector that should be equalizing the balance stands out in the complicated structural situation of France on a financial level and, in particular, on a political level. Regarding the first, Fitch points out that “the profitability of French banks will lag behind compared to its European peers until the end of 2025 because a structural slowness in pricing and much higher deposits has been generated.” In summary, French banks were forced into “intense competition” when it came to offering mortgages or capture deposits that has more than weighed down their numbers.
“The sector’s operating profit/risk-weighted assets (RWA) ratio was still slightly below 2%compared to at least 3% in most other major European markets.” Fitch commented in its latest report. “The consolidated revenues of the six main French banking groups (BNP Paribas (BNPP), Crédit Agricole, Société Générale , BPCE, La Banque Postale (LBP) and Crédit Mutuel Alliance Federale (CMAF)) increased by an average of 1.8% year-on-year in the first half of 2024, while costs decreased by around 1%.”
Although there is another really important factor, politics, France’s deficits and their impact on French bonds. French insurers and entities have large amounts of national bonds on their balance sheets, which leaves them exposed to the weakness that they have experienced. This caused real stock market bleeding when the legislative elections took place in France and fears grew of real fiscal problems in the country with a divided executive and the possible rise of Jean-Luque Melenchon and Marine Le Pen.
“The business models of most firms imply dependence on the wholesale market and are especially exposed to problems in the debt market”
Now, although the political situation seems to have calmed down, fears of an increasingly unsustainable structural deficit in France remain fully established. Not in vain the EU assumes that by 2024 France’s deficit reaches 5.3% and 5% by 2025. Future political decisions indicate that this trend is here to stay. “We anticipate that the government will have difficulty passing a budget that substantially reduces the deficit next year and, as a result, we believe that the spread between French and German government bonds is likely to continue to widen in the coming weeks and months,” comment the Capital Economics experts.
This has caused a historic situation to occur, the markets are already paying more for France’s debt than for Spain’s. The 10-year French titles have a profitability of 3.154% compared to 3.125% of the Spanish. This scenario, totally unthinkable not so long ago, now confirms the weakness of French debt, something that has a clear impact on banking.
From S&P Global they comment that “the business models of most firms imply dependence on the wholesale market and are particularly exposed to problems in the debt market, in addition to the fact that an increase in spreads could increase their costs.” In short, structurally lower bonds “can represent a lasting drag on earnings.”
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