Even if we are very far from the strong increases on Wall Street, 2024 is not really a bad year for Europe. Since the start of the year, the EuroStoxx 600 has progressed by a timid increase of 6.5% in the heat of promises of rate cuts. The Ibex 35 flies with increases of more than 16%the Milan stock exchange rose by 13% and even the German stock market, whose economy is facing recession and stagnation, rose sharply by 14.5%. In this context where European stocks seem to be going through a big moment, one of their biggest supporters is being left behind. The Paris Stock Exchange is evolving negatively with declines of 2%, following a completely different trajectory from that of its peers.
In this sense, while investors from around the world, dizzily observing the rises on Wall Street, turned to the old continent in search of a calm but less overheated market, a real storm has settled on the stock market French. The year hasn’t started off badly for French titles, which they revalued by 9% at its August peaks. At the time, Paris held the world’s most expensive stock market crown, a title that has seen declines since London. Since the fifth month of the year peaked, it has fallen 10% and has clearly entered negative territory.
It all started in the summer. At that time, three major problems revealed themselves in their maximum intensity which overwhelmed the index destined to rule Europe with rate cuts and the fragile situation in Germany. And it is not only that three problems have appeared, but that its great assets have since then and over the months become the Achilles heel of one of the few selective ones among the big ones, preventing this market from reaching the potential that many hoped for.
The collapse of luxury
The probably decisive factor because of its importance. Only LVMH (parent company of Louis Vuitton) represents 10% of the entire index and Hermes 3.73%, Kering 1.3% and L’Oreal 5%. Addition to Pernod Ricard (1.57%), we say that only this select group represents a quarter of the entire index. And even though these companies filled the euphoria index last year and early 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 richest do not generally abandon purchases of this type) has found that demand has paralyzed and this has taken away its great weapon to maintain profitability , price control. Even though prices have increased by 22% since 2019 In the sector (according to Bain & Company), KPMG explains that there already exists a “natural limit” that “discourages consumption” around the world.
However the main front is ChinaAccording to Bernstein’s forecasts, for all these companies, the Asian giant constitutes their main market. Today, it already represents 35% of Gucci’s sales, 27% of those of Louis Vuitton and 26% of those of Hermès. However, the key is 4.7% growth, or at least that’s what analysts thought until now.
Since before the summer, sales in China have fallen as the country’s economy It’s not growing as expected. The stimulus measures promised by Beijing could change this reality but, for the moment, they have not succeeded and the profits of these companies remain under siege. This was for example seen in LVMH’s third quarter results, published in October and which reported a 3% drop in revenues, mainly weighed down by China.
From HSBC they expect a general blow. “Due to (the poor Chinese performance) we reduce our estimates“We no longer expect a return to double-digit growth in the third or fourth quarter of 2024, despite the fact that we have a much simpler basis for comparison.”
This led these companies to record very negative performance. LVMH was one of the biggest drivers with a drop of 17.8% which, given its large size, represents a devastating blow for the whole. Also Kering which fell by 43%, L’Oréal by 23% and Pernod Ricard by 28%. YesLuxury handbag brand Hermès offers nothing but relief on this front. which, despite the dynamics of the sector, has rebelled with an increase of 7% in 2024 thanks to its less dependence on China and its greater presence in other markets such as the United States. However, the reality is that the sector represents a heavy burden.
industrial coup
For its part, France is, with Germany, one of the EU countries most affected in its industrial sector. This has increased certain figures which could reverse the situation. Highlighting Stellantisthe automobile group behind Renault, Chrysler and Fiat, which is one of those suffering the most from the automobile crisis.
In fact, this company is down nearly 41% so far this year due to higher costs, demand weakened by high interest rates and the strong competition from cheaper Chinese models are poison. The rest of the industry also pales in the Cac 40 where only factories dedicated to Defense such as Saffron or Thaleswhich are experiencing renewed interest due to the rearmament of Europe.
However, to return to the specific case of Stellantis, the crisis in the sector was felt particularly in its latest results, in which a drop of 27% was noted in your income. Morgan Stanley commented in its latest report that the company is on the verge of a “long cycle” of negative margins due to expectations being too high for 2025 and 2026.
Beyond the automobile industry, the latest PMIs published by S&P Global relating to French industrial activity highlight the problem. Last November, industrial production fell at its fastest rate in nine months. The general purchasing index stands at 44.5 points (50 points mark growth or contraction). “The French manufacturing sector remains in a deep crisis,” said Dr Tariq Kamal Chaudhry, an economist at Hamburg Commercial Bank. “The outlook remains gloomy and there is no sign of an upward trend on the horizon.”
The “victorious” big bank… deactivated
But 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 among 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 low in the overall calculation of the index, with 9.55% of it. In other words, it’s less than half the luxury beat.
Beyond the question of size itself, the growth of its financial sector lags far behind that of its peers in the rest of the continent, particularly in Southern Europe. The paradigmatic example is Spain where not only does the financial sector represent more than 30% of the total weighting of the Ibex 35, but it climbed 28% so far this year, compared to just 8.5% of its clear counterparts.
The reason which slows down the sector which should equalize the balances emerges in the complicated structural situation of France on the financial level and, in particular, on the political level. Concerning the first, Fitch emphasizes that “the profitability of French banks will lag behind compared to its European peers until the end of 2025 as structural slowness in pricing and much higher deposits have been generated. » In summary, French banks were forced into “intense competition” when it came to offering real estate loans or capturing deposits which more than increased their number.
“The sector’s operating profit/risk-weighted assets (RWA) ratio remains slightly below 2%compared to at least 3% in most other major European markets”, commented Fitch 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 Fédérale (CMAF)) increased on average by 1.8% year-on-year in the first half of 2024, while costs decreased by around 1%.
Although there is another very important factor, politics, France’s deficits and their impact on French bonds. French insurers and entities have significant sums at their disposal national bonds in their balance sheets, which exposes them to the weakness they experienced. This caused a real stock market hemorrhage during the legislative elections in France and fears grew of real fiscal problems in the country with a divided executive and a possible rise to power of Jean-Luque Mélenchon and Marine Le Pen.
“The business models of most companies involve a reliance on the wholesale market and are particularly exposed to debt market problems”
Today, even if the political situation seems to have calmed down, fears of an increasingly unsustainable structural deficit in France remain fully anchored. It is not in vain that the EU assumes that by 2024 France’s deficit reaches 5.3% and 5% by 2025. Future policy decisions indicate that this trend is here to stay. “We expect the government to have difficulty passing a budget that significantly reduces the deficit next year and, as a result, we believe the spread between French and German government bonds is likely to continue to widen in the coming weeks. and the months to come”, comment the experts at Capital Economics.
This has caused a historic situation: the markets are already paying more for French debt than for that of Spain. French 10-year securities have profitability of 3.154% compared to 3.125% of the Spaniards. This scenario, completely unthinkable not so long ago, today confirms the weakness of French debt, which has an obvious impact on the banking sector.
From S&P Global they comment that “the economic models of most businesses involve dependence on the wholesale market and are particularly exposed to debt market problems, in addition to the fact that an increase in spreads could increase their costs. » In short, structurally weaker bonds “may represent a lasting drag on profits.”
