Bloomberg News

History Forecasts CAC 40 Gain in Month to French Election

March 29, 2012

France’s CAC 40 Index (CAC) may rally in the month leading up to the country’s presidential election in May at a rate three times the average, if history is a guide.

The gauge has risen an average of 2.1 percent in the month preceding the final voting in the past eight election years back to 1965, surpassing the 0.7 percent increase in the monthly rolling average, according to data compiled by Bloomberg and NYSE Euronext. The index has dropped 2.8 percent on average in the month following the election, the data show.

Investors including Jerome Forneris of Banque Martin Maurel and Arnaud Scarpaci of Agilis Gestion SA, who are both buying French shares with earnings most closely tied to the economy, say they expect stocks to advance regardless of whether incumbent Nicolas Sarkozy or Socialist Francois Hollande is favored to win. Voters will cast ballots on April 22 for the first round and on May 6 for the final vote.

“The candidates have programs with good promises,” said Forneris, who helps manage $11 billion at Banque Martin Maurel in Marseille. “We buy the program and then after the election, we sell on the news. After the election, the market often falls. Promises often aren’t kept or the president says he can’t carry out certain things right away.”

In the month before Sarkozy was elected in 2007, the CAC 40 climbed 5.8 percent, the most before a presidential vote since Francois Mitterrand won a second term in 1988, when the index advanced a record 11 percent in the prior month, according to Bloomberg and Euronext data. The index advanced 1.6 percent in the month following Sarkozy’s appointment, the data show.

Opinion Polls

Hollande would win the second round 54 percent to 46 percent for Sarkozy, according to an Ifop poll for Paris Match published on March 23.

Both candidates want to increase taxes to cut the deficit and to impose fees on financial transactions. Hollande says he’ll meet Sarkozy’s goal of cutting the deficit to 3 percent of gross domestic product by next year from 5.3 percent last year. He says he wants to create a government bank to finance small businesses and to target support for specific industries rather than an across-the-board cut in employers’ contribution to state-managed family allowances.

Sarkozy is proposing a 13-billion euro ($17.3 billion) cut in payroll charges to be funded with a higher value added tax, to boost French competitiveness after the country’s trade gap widened to a record 69.6 billion euros last year.

The CAC 40 rallied 8.6 percent this year through yesterday, beating the 8 percent advance for the Stoxx Europe 600 Index (SXXP). The French equity gauge was up 23 percent from its almost 2 1/2- year low on Sept. 22. It fell 0.1 percent to 3,427.44 as of 10:39 a.m. in Paris today.

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“The electoral system pushes candidates to elaborate on their economic projects,” said Emmanuel Soupre, who helps oversee $5.5 billion at Neuflize Private Assets in Paris. “That creates optimism. It’s not quantifiable. It is about the psychology of the market.”

The benchmark index sank 17 percent last year, as concern grew that the European debt crisis would hurt financial companies such as Societe Generale SA (GLE) and Credit Agricole (ACA) SA, the nation’s second- and third-largest banks, respectively. Societe Generale lost 57 percent in 2011 and Credit Agricole slid 54 percent for the third- and fourth-biggest declines in the index, according to data compiled by Bloomberg.

Martin Maurel’s Forneris, who says the CAC 40 may gain 4 to 5 percent from now through mid-April, started buying cyclical stocks about a month ago expecting them to double the index’s increase. His recent purchases include Societe Generale, PSA Peugeot Citroen and Legrand SA. (LG)

Growth Stocks

“There is a lot of liquidity out there and the environment is improving,” he said. “The gain can only come through with the help of financial stocks.”

Societe Generale has soared 33 percent this year after the European Central Bank’s long-term refinancing operation lifted lenders across the region. Peugeot (UG), Europe’s second-biggest carmaker, jumped 20 percent and Legrand, the world’s largest maker of wiring devices, increased 11 percent.

Still, some investors say any movement in the CAC 40 prior to elections is unlikely to be attributed to national politics.

“There isn’t much correlation left between the CAC 40 and the election,” said Louis de Fels, a Paris-based money manager at Raymond James Asset Management International, which oversees $35 billion worldwide. “Because of globalization, indexes depend on world events now.”

Carmaker Renault SA (RNO) and Alcatel-Lucent, the Paris-based networking-equipment maker, have posted the two biggest rallies among all CAC 40 stocks so far this year, gaining 49 percent and 46 percent, respectively.

Scarpaci of Agilis Gestion in Paris, which oversees about $84 million, recently bought shares of Alstom SA (ALO), saying industrial shares will benefit from contract wins no matter who is elected. Alstom, the third-largest power-equipment maker, is up 26 percent this year.

“During the electoral period, there is optimism about political change that will impact growth,” Scarpaci said. “Cyclical stocks can lead the index higher.”

To contact the reporters on this story: Adria Cimino in Paris at acimino1@bloomberg.net; Cecile Vannucci in Amsterdam at cvannucci1@bloomberg.net

To contact the editor responsible for this story: Andrew Rummer at arummer@bloomberg.net.


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