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Good morning,

Markets are called to open flat this morning. This is what's happening today:

  • Bank of Japan Governor Haruhiko Kuroda pledged yesterday to take all steps necessary to meet a 2% inflation target, having last week announced plans to double the monetary base by the end of 2014;
  • China’s new bank loans and aggregate financing rose more than economists forecast in March, a sign demand is picking up in Asia’s biggest economy;
  • The U.S. is scheduled to sell $13 billion of 30-year debt today in the last of this week’s note and bond sales, which will total $66 billion;
  • European finance ministers travel to Dublin before Ecofin meeting;
  • Roche, Marks & Spencer report sales.

This morning i'd like to share with you an interesting analysis on the French market by JP Morgan –

French stocks holding up well so far – time to look for underperformance to finally begin?

About 6 months ago, we started to hear increasingly vocal arguments that French equities were doomed to suffer. Frustrating the bears, they have delivered solid gains since. CAC has outperformed Dax and EuroStoxx50 by 250bp and 400bp respectively.

  • At the time, we didn’t join the “short France” bandwagon as our view was that French equity market was too international and that it would be helped by an improvement in sentiment towards the periphery. However, we are becoming increasingly concerned about the sharp deterioration in French activity relative to the rest of the region. The gap between the French and Eurozone composite PMIs is at a record wide. France’s March print was lower than for any other large Euro country. Current account balances are deteriorating sharply in France, in contrast to an improving trend in other Euro countries.
  • True, the French consumer has been very resilient to date. In fact, French retail sales are 3% higher than their ’08 level. This compares to Eurozone retail sales, which are 6% lower. The question though is how sustainable is this in face of intensifying fiscal austerity, rising unemployment and political uncertainty. France is the only EMU country where our economists expect the magnitude of fiscal tightening this year to increase compared to last.
  • CAC constituents derive about two-thirds of their revenues from abroad. Still, as seen in the top chart, there has historically been a strong correlation between the French PMI and the performance of French equities. The recent decoupling is worrying, in our view. In addition, French PMI was typically a good leading indicator of CAC EPS momentum. We think that the IBES estimate of 15% cumulative EPS growth in ’13 and ’14 is unrealistic unless French activity momentum rebounds sharply.
  • We believe that long Eurostoxx50 vs CAC might be an attractive trade. Some of the past outperformance of the CAC might start to reverse, especially as there is no valuation support.
  • Counter intuitively, the basket of French stocks with significant domestic exposure has outperformed the exporters basket over the past 12 months. We think this is unlikely to continue and would recommend going long the Exporters vs Domestic basket (screens in the report). We have also screened for the non-French stocks with large sales exposure to France that could be at risk.
  • We have put together the list of French stocks that have government stakes. While the government is unlikely to divest many of these in a hurry, for the ones that it does there may be benefits, both in terms of improving corporate efficiency and stock liquidity.

For more information on the CAC or other stocks and bonds we follow, contact our offices on 25688688.

Good day and happy trading!

Kristian Camenzuli