Britain's vote to leave the European Union is yielding some positive consequences for France; investors would do well to follow what is going on over there, as it opens potentially lucrative opportunities.
Generally, and especially among investors in the Anglo-Saxon space, France has the reputation of a country that puts politics way above business and where anti-business sentiment runs high. There are signs that Brexit could change all that.
Last week, while investors' eyes were glued to the British High Court's ruling that only parliament can trigger Article 50 of the Lisbon Treaty to take the country out of the EU, over the Channel participants in a roundtable in the French parliament were discussing ways to profit from Brexit.
First of all, François Villeroy de Galhau, Banque de France governor, said on the sensitive issue of clearing euro-denominated securities after Brexit: "The principle is clear: it's hard to imagine that clearing in euro can be situated outside the eurozone. This needs a judicial change."
This issue of clearing euro-denominated derivatives is very important for London. Around half the $1.2 trillion of derivatives deals in various currencies cleared in London daily are euro-denominated swaps. Last month, at a meeting of the British Bankers' Association, participants said they were worried that if this is taken away from the U.K., other business will follow in short order.
Fighting euro-area policymakers over this will prove difficult. The French are particularly determined to get some of London's financial services trade.
"The eurozone has a strong advantage: savings. The raw material of the financial sector is made in the eurozone," said de Galhau. "The French advantage is that it has some of the best players of the eurozone if we look at banks, insurers, etc."
Arnaud de Bresson, head of Paris Europlace, an association created to promote Paris as a financial center, noted that the French financial industry employs 1.2 million people, making up 6% of employment in the Paris region.
"Brexit offers us a historic opportunity ... 40% of transactions in euro are made in London. This situation becomes absurd from the moment the U.K. leaves the EU," he said.
Companies cite the rigid regulatory and fiscal system as well as instability in regulation regarding the labor market and tax environment as their main reasons not to relocate to Paris, according to de Bresson.
His organization is proposing four big reform areas for the government to tackle in order to make France more attractive to foreign investors: reducing corporate tax to bring it closer to the European average, cutting taxes on salaries, taking fiscal measures to encourage long-term savings, and adopting stability and clarity of taxation as a guiding principle.
While this does not sound like a big change, it does show that France is talking business. Investors keen to keep an eye on the country for possible opportunities could start by looking at three big companies in three big sectors: energy, consumer and finance. All three offer the advantage of exposure not just to France but to emerging markets as well.
Total (TOT) is a stock to watch in the energy sector. The Financial Times quoted the Iranian oil minister as saying that the French company, together with China National Petroleum Corp., is due to sign the country's first deal to develop its gas fields since the sanctions were lifted in January.
This would mark the return of Total to Iran six years after it exited the country in the middle of tensions after international accusations that Iran was seeking to develop a nuclear bomb. The company has said before that it was interested in investing in Iran.
Valuation-wise, Total's shares look relatively cheap compared with other big companies in its sector. They trade at a forward 12-month price/earnings multiple of 11.8x vs. BP (BP) at 14.9x or Exxon Mobil (XOM) at 21.5x, according to data from FactSet.
Consumers in the eurozone are set to benefit from prolonged low interest rates as well as slow but steady improvement in employment that is set to spur household spending. Retailer Carrefour (CRRFY) is well-positioned to take advantage of the recovery of the European consumer.
It is the sixth-largest retailer in the world by revenue, according to rankings calculated by Deloitte and STORES Media, with well-diversified exposure to developed and developing markets. It is one of the dominant retailers in fast-growing Central and Eastern European (CEE) countries, doubling down on any windfall from recovery in the eurozone as CEE is closely linked to the single-currency area.
This one is also relatively cheap, trading on 13.4x forward 12-month earnings vs. its own five-year average of 14.4x and compared with 21.6x for fifth-largest retailer in the world Tesco (TSCDY) and 16.1x for world's biggest retailer Walmart (WMT) .
Finally, bank Societe Generale (SCGLY) reported better-than-forecast profit of €1.1 billion ($1.2 billion) in the third quarter vs. expectations of €922 million, with profit in its investment banking arm jumping by more than 40%.
The bank's shares offer a juicy dividend yield of 5.4% vs. its five-year average of 2.8%, and it trades at a forward 12-month P/E of 8.6. That means its shares are cheaper than rival banks such as Barclays (BCS) , which trades at a forward 12-month P/E of 10.2, or Royal Bank of Scotland (RBS) at 11.6.
With presidential elections due in the first half of next year, volatility could increase for the French stock market. However, there are signs that the language of business is increasingly heard in Paris. Investors should take advantage of volatility to find what could prove to be very good investments down the line.
