(Bloomberg) -- French markets greeted Prime Minister Michel Barnier’s plan to rein in the nation’s deficit with little more than a shrug, as investors seek further signs that his government will draw a line under years of fiscal profligacy.
The CAC 40 Index inched higher after slipping as much as 0.5% in early trading; Airbus SE led gains while LVMH Moët Hennessy Louis Vuitton SE was the biggest drag on the index. Meanwhile, government bonds traded steady with the extra yield they pay over safer German notes, a closely-watched gauge of French risk, holding at around 77 basis points.
“It’s pretty much already priced in the CAC 40,” said Pierre-Yves Gauthier, head of research at AlphaValue. “What matters is the widening of the spread, the signature of the French state, that’s an issue.”
The French government on Thursday unveiled a budget for next year that aims to deliver €60.6 billion ($66.2 billion) in spending cuts and higher taxes to contain the ballooning deficit. The Treasury also announced plans to sell €300 billion in bonds, an increase in line with analyst expectations.
While the details of the budget removed some of the question marks over how the government plans to overhaul the public finances, Barnier still needs to convince a fractious parliament to agree to it. A slew of credit ratings reviews, starting with Fitch Ratings tonight, poses another immediate hurdle.
“Bottom line, French bonds are still not floating our boat,” Barclays Plc strategists including Rohan Khanna wrote in a note. “Uncertainty around whether this budget proposal will pass parliament alongside the ability of the government to achieve this scale of fiscal consolidation is likely to keep OATs on the back foot versus peers,” he said, referring to the nation’s bonds.
France’s Years of ‘Fiscal Murder’ Are Catching Up With It
Lawmakers will start reviewing the proposals next week. Spending cuts will account for just over two thirds of what Finance Minister Antoine Armand called an unheard-of fiscal effort, with the rest coming from higher taxes on businesses, the wealthy and energy.
Market participants are already voicing skepticism over the government’s ability to meet its targets, which include reducing the deficit target to 5% of gross domestic product next year from a forecast of 6.1% for 2024.
Fitch, which downgraded France last year, may issue a new assessment on Friday, followed by Moody’s on Oct. 25 and S&P a month later.
“Amid political uncertainty, this budget continues to point to increased downside risks to French credit ratings,” said Citigroup strategist Jamie Searle. “The downside is perhaps greatest from any rating action by Fitch this Friday as that would open the door to a single-A rating, which might prompt outflows from rating-sensitive investors.”
In equity markets, strategists are watching French blue chips that will bear much of the brunt of tax hikes, alongside wealthy individuals. Under the plans, stock buybacks would be taxed and additional levies would temporarily apply to some 440 profitable companies with annual revenue of more than €1 billion — making the impact on earnings top of mind for investors.
UBS Group AG strategists Sutanya Chedda and Gerry Fowler estimate the latter plan could cut profits across the CAC 40 Index by as much as 9% in 2025. The impact on the pan-European Stoxx 50 index would be about 3%. Among sectors most likely to be negatively affected are utilities, telecommunications and energy, which also tend to have thinner margins, they said.
“The impact will be negative for French equities, in particular for the largest capitalisations with France revenues in excess of €3 billion and a significant French tax base,” Thomas Zlowodzki, head of equity strategy at Oddo BHF, wrote in a note. “Small and mid-caps stocks will be less affected than large caps.”
--With assistance from Michael Msika and Farah Elbahrawy.
(Updates market moves, and adds additional context and analyst quotes throughout.)
©2024 Bloomberg L.P.
