Value Column von Hans Peter Schupp

20. APRIL 2023

The Gaulish chanticleer – proud and strong

France can’t catch a break. Protests have continued across France following the approval of the controversial pension reform by the French Constitutional Council. In Nice, demonstrators marched along the waterfront. In Rennes, too, the tone turned sharp: The ruling was a declaration of war, said demonstrators in the Breton capital; a little later, a police station there burned. And there is no end in sight.

Stock market defies the political turmoil

The economic burden on the French economy is already considerable. Final figures are not yet available, but the damage is estimated at many billions of euros. Numerous companies are directly affected, others are suffering from the protests and strikes. And what is the stock market doing? It’s doing great! Since the beginning of the year, the French benchmark index CAC 40 has gained almost 15 percent.

French companies with a strong international presence

What are the reasons? With the exception of utilities and real estate companies, most French companies generate most of their sales abroad. They have historically been headquartered in France, but the the bulk of business is generated throughout Europe and globally. A few examples that can be considered representative: Savencia, a company in the portfolio of our Contrarian Value Euroland fund, is Europe’s largest cheese producer with varieties such as Bresso, Caprice des Dieux, Fol Epi and Géramont. The group makes 46 percent of its sales across Europe, the rest all over the world. So France is anything but dominant. Or the manufacturer of lighters, ballpoint pens and razors, the BIC Group. The company makes less than a third of its sales in Europe, the Middle East and Africa. And as a final example, Trigano. Europe’s largest mobile home manufacturer generates less than a quarter of its sales in France. The list could go on and on.

Profits of subsidiaries used for share buybacks

On the other hand, one must not forget: Paris is powerful. The French state is particularly strong and often interferes heavily with companies through taxes, regulations and restrictions. How could companies respond to this?  Well, they could use a kind of parlor trick.. They leave profits of subsidiaries abroad. These, in turn, use their profits to buy back shares in the parent company. This is perfectly legal and is finally to the benefit of the shareholders as fewer shares on the market lead to higher earnings per share.

Country weightings do not matter to us – only the company itself counts

We are slightly overweight in France in our fund. But that has less to do with the country itself. There are stronger and weaker countries in Euroland. But we try to avoid the strong countries. We tend to invest in the weaker countries because they are not so much in the focus of analysts and investors. For us, everything revolves around the valuations of the individual companies. Country weightings don’t play a role there. However, these favorably valued companies tend to be found in the economically weaker countries. At the moment, France is one of them. Geopolitical and economic uncertainties are also the attention of our neighbors. While growth of around two percent was still expected for 2022, it could be zero growth in 2023. President Macron and his problems send their regards.

Translation for convenience only!

The author: Hans Peter Schupp is a board member of FIDECUM AG and portfolio manager of the Contrarian Value Euroland fund.