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LGIM warns on French equities
08 May 2014
France is lagging behind Germany on many economic factors. Hannah Smithies reports from LGIM’s monthly Fundamentals briefing
Legal & General Investment Management (LGIM) has expressed
doubt over the French economy’s ability to catch
up to that of Germany, despite the government’s
recent promise of economic reform.
LGIM expects France’s GDP growth to average less
than 1% over the next few years, half of that expected from
Germany, and below that for Spain.
"We are not convinced that now is a good time to buy French
equities over German equities," said Hetal Mehta, economist at
Legal & General. "While we certainly agree that reforms are
needed, we’d add that reforms must be correctly
targeted in order to have the desired effect."
Germany is clearly outperforming France on most economic
indicators in addition to GDP growth, including unemployment,
labour cost competitiveness and fiscal policy management,
confirming Mehta’s description of France as "the
sick man of Europe".
Business and consumer sentiment in France has increasingly
lagged behind that of Germany since 2010. France is now at a
crucial juncture as public opinion has started to shift towards
spending cuts and deficit reduction whilst sentiment towards
President Francois Holland’s Socialist government
Reforms promised by the French government include lowering
taxes and creating more jobs, but have failed to include
measures to create more flexibility in the jobs market, which
LGIM said is an oversight.
"The inflexibility caused by the cumbersome employment laws has
undoubtedly held back the French economy and contributed
towards the structural shift towards higher employment," said
France’s labour market is one of the most
highly-regulated in the OECD since making significant
improvements over the past 24 years, and also has
highly-regulated product markets compared to many other
"If you look back to 1990 France used to have one of the least
regulated labour markets but now that’s turned
round. France is bucking the trend to their detriment."
Unit labour cost has also risen by 30% since 2000 while only
rising 11% in Germany through the same period, leading to
France losing an important competitive advantage.
Mehta also said there was a need for reform in public finances:
"Until 2009, France and Germany had a similar debt and deficit
profile, but since then the two economies have diverged. The
government has proposed a reduction in corporation tax and
income tax but the details on corresponding spending cuts are
The French government’s proposals show good intent
but concrete changes to policy and more details are required in
order to inspire confidence in investors.
This spells further disaster for France, which saw a 77% plunge
in foreign investment over 2013 to $5.7bn (£3.5bn), the
lowest level in 27 years.
While the outlook for France is negative by and large, Mehta
pointed out that demographically France does has an advantage
over Germany. The French population is growing much faster than
Germany’s and its working age population is stable
whereas Germany’s is heading downwards.
Though strong at the moment, Germany may face its own
challenges in the years to come. Despite the demographic
outlook it decided recently to lower retirement age.
"Germany will have to refocus on productivity gains in order to
secure long-term growth and prevent an overshoot in wage and
price inflation, which could eventually lead to longer-term
stagnation," said Mehta.