Has the Next Reagan Revolution Reached France?
With the recent election victory of Nikolas Sarkozy in May, French markets are about to change for the better.
Through a bold package of tax cuts and socioeconomic reforms expected to be legislated later this year, the new French president is slowly following in the same footsteps as Ronald Reagan, Margaret Thatcher, Gerhard Shroder and Angela Merkel.
If you bought U.S., British and German stocks before those major legislative changes affected their economies, your portfolio results would have been quite spectacular. That's because tax cuts help to boost domestic consumption, put more money into individuals' pockets and encourage companies to increase capital spending. That's what Reagan did starting in 1981. President Regan followed Maggie's bold moves in depressed England a few years prior. That's exactly what the Germans have done since 2003.
Economic and social change in a country like France won't come easy. Sarkozy has to contend with militant unions opposed to working longer hours. Plus, the state's welfare program is drowning in red. France, a co-architect of the European single currency in 1999, is also one of its most heavily indebted EU members after Italy. The French need to boost productivity, competitiveness and encourage foreign direct investment with an attractive tax policy. But now, all of these changes are on the way and Sarkozy is the right man to make them happen.
If that's the case, and if tax cuts are coming in France, then stocks listed on the Paris CAC-40 Index are definitely a "buy."
French stocks have trailed European averages this decade and have badly lagged Germany's DAX Index, where tax cuts are now in their third year. Many French stocks sport solid dividends and strong earnings growth. And I'm not too concerned about rising short-term European interest rates. From their lowest point about 18 months ago, short-term and long-term bond yields were abnormally low, so the current rate hikes on the Continent are rising from a very low base, not enough to harm economic growth in France.
In short, buy French stocks.