Blain's Morning Porridge - France? So bad it can't get any worse?
Mint – Blain’s Morning Porridge – Feb 6th 2017
“How can you govern a country with 246 varieties of cheese?”
I'm still in a state of happy shock after Scotland’s confident win over Ireland on Saturday. To be fair, the Irish didn't turn up for the first 40 minutes and weren’t terribly interested thereafter, but Scotland played a clever game.. The England France game was a different matter - bruising heavyweight rugby which the French could well have won. I am slightly concerned on how Scotland’s lightweight pack will fare versus these unfeasibly large Frenchmen next week…
Back in the real world…. Trump’s promise to unwind Dodd Frank has boosted US financials. Is that a good thing?
The market thinks so, but do US banks need to be unleashed? US financials were forced into pragmatic recapitalisation post 2008 crisis, and have since been reforming and adapting themselves for a new tougher financial world. Most have adapted rather well – ie compare and contrast to as-yet-unreconstructed European names.
Now, Trump has re-opened the arena to them. Having some knowledge of how US investment banks think and work – I know what happens next. It’s along the lines of: “the only thing that is worse than a lack of freedom is too much freedom” or something like that. Will greedy banks try to retake the flags and unleash a spawn of new financial initiatives into markets in pursuit of fees…? Well perhaps. Another aspect could be a wave of hiring and trying to re-enter markets and sectors – the kind of cyclicality which is very bad for stock holders. I’m sure you get my concerns.
Back to France, and over the non-Rugby phase of the Weekend, the BBC turned its eyes on the French election. They basically got it right by reporting Marine Le Pen is unlikely to win the French Presidency despite the disarray among the conventional parties. Markets also understand why Le Pen is a long shot. But, the fear for markets is France will end up with a "anyone but Le Pen" government that will make the current bumbling, tinkering at the edges, kind of approach of the Hollande administration look almost professional.
One line I have to share from one very good report on France is worth a share: “France has 13 Regional Governments, 96 Departments, 343 Arondissments, 4058 Cantons and 35,699 municipalities. What do they all do? We have no idea.”
The consensus view remains France is hurtling towards crisis – the overblown state, high employment costs, maximum working hours, fractured industrial relations, red-tape and growing discontent between Paris and the hinterland spells ongoing trouble - hence the widening OAT spread to Bunds, and under-performance of French stocks. Although recent French numbers have been surprisingly strong, France remains oversold. Many buyers regard decent numbers as a last gasp before the economy tumbles. And the fact the "best hope for Growth" candidate, Fillon, seems to have blotted his chances irreparably, has caused many to lose hope.
But…. Just when the skies are darkest..
Recently, I've read a number of very interesting reports suggesting a decent contrarian play: France could well see its position as Europe's sickest man (and that's a pretty competative market) turn around. They might be on to something. Despite the potential for damaging compromise and another week “Hollandesque” presidency, whomever wins the election will likely be pro-growth and pro-reform.
And France might be more receptive to change. While I was skiing recently I met some young French bankers who have taken the massive step of moving back to Paris from London after losing jobs here. They admit Paris remains a parochial financial centre, but is opening up in terms of opportunity and rewarding excellence – both are better off in Paris! They think their return home has proved a smart move – whereas a year ago I would not have been able to find a single Frenchman in London who would ever return!
Imagine if France was to experience the kind of reform wave that's turned around other countries that made the "Sick-man of Europe" Economist front page - which included the UK in the 1970s and Germany in the 90s, the upside could be considerable. With real reform on the agenda – perhaps France is a buy.
The conclusion from most French upside callers is France needs to roll back the state. Historically, and I mean since pre-reformation, French Government has been massively padded and bankrupted the state on a number of occasions. However, if it can change…
Perhaps France is worth a think about.
Meanwhile, back to the daily grindstone. Got a couple of very interesting potential new “alternative financings to look at, and some “challenging” but rewarding secondary private placements to play with. Anyone fancy a 6.75% 10-yr diversified yield from aviation.. give me a shout..
Out of time..
Bill Blain