France's 'Twins of Ruin' May Bring Opportunities for Investors

 | Apr 18, 2017 | 9:00 AM EDT
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With the Turkish referendum delivering an almost inconclusive and highly contested result -- which President Recep Tayyip Erdogan prefers to call a victory for his side -- the next big political event for Europe is the first round of the French presidential election next Sunday. 

(Yes, I am aware that U.K. Prime Minister Theresa May just called a snap election, but that will take place on June 8. One uncertain, instability-laden political event at a time, please).

With the first round of the French presidential vote, the danger is a resulting runoff between the extreme right (Marine LePen) and the extreme left (Jean-Luc Melenchon). As I wrote last week, Melenchon is a Hugo Chavez fan who has jumped in opinion polls lately because many people are fascinated by his anti-capitalist rhetoric, which includes the pledge to introduce a 100% top tax rate.

The thought of a runoff between the "twins of ruin" -- as they were dubbed by French magazine Le Point in a recent column -- is incredibly depressing; but still, investing must continue. If indeed we wake up next Monday to face a French presidential election runoff between LePen and Melenchon, France -- and possibly much of Europe -- will be un-investable for a while.

But for investors who like to buy on the sound of cannons, as Rothschild famously recommended a long time ago, this week could prove to be a crucial one for opportunities. Fear-induced volatility could create various bargains in Europe.

Among the stocks that investors with plenty of discretionary capital and appetite for risk could consider, equity strategists at French bank Societe Generale highlight value stocks. They say that because of falling unemployment and improving confidence, the eurozone is still a good bet for investors.

They like the consumer space, while at the same time they recommend staying away from staples, which tend to underperform when bond yields are rising. They are staying away from telecoms, utilities and real estate for the same reason.

In the consumer discretionary space, five stocks made it on their premium recommendations list:

Accor (ACRFY) is primarily listed in Paris and invests in hotel properties. The company derives around 30% of its revenues from France, more than 40% from Northern Europe, 11% from Asia and 7% from the American continent.

The sale of its property unit HotelInvest as well as a potential share buyback should offset weakness in Europe and notably in France, according to Societe Generale's strategists. Also, the recent acquisition of FRHI Hotels & Resorts broadens Accor's offer due to the shift toward the luxury segment that it represents.

Publicis (PUBGY) is another French company that is worth watching. Year to date, the stock of this advertising specialist lost about 1.5%, but Societe Generale's strategist argue that the company should benefit from the dollar's appreciation if the euro stays weak. Publicis derives more than half its sales from North America.

Inditex (IDEXY) , the Spanish clothing maker, is a promising stock, too. The company owns brands such as Zara, Pull and Bear, Stradivarius, Bershka, Massimo Dutti and Oysho. The company "continues to leverage recent investments in headquarter upgrades, online and RFID technology," the strategists wrote in a recent report.

Two carmakers are also on their list. The Frankfurt-listed shares of Germany's BMW (BMWYY) are trading at 3.6x EV/EBIT based on estimated full-year 2017 earnings, which is half the stock's long-term average of 7.2x, according to the strategists.

French carmaker Renault (RNSDF) is the other European auto maker they recommend as its earnings and revenue for last year beat consensus expectations. The company has a full year of new products, alliance synergies and recovery in emerging markets ahead of it, the strategists said. But they also warned that raw materials, Brexit and trade agreements are big unknowns for Renault.

Less than a week before the first round of the French presidential election, declines in high-quality European stocks could become buying opportunities. Overall, the eurozone is recovering and benefits from a much more dovish central bank than the U.S. Disaster may still be averted.

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