French markets and the 2017 election
Labour laws on the French economy will be a game-changer.
Dubai - Here's whay companies are not exactly thrilled with new laws
The most important event in France last week was the birth of my newest niece in Paris, Diane Laila de Ricaud. Bienvenue, notre bébé comtesse! The other French "événement" was a full-blown political crisis in the Élysée Palace after President Hollande invoked Article 49 of the constitution to reform France's rigid labour laws ignited a revolt in the National Assembly in his own Sociality Party. Aux armes, citoyens, all over again! I have always wondered why big things happen in France in May, like the birth of little Diane and the no-confidence vote against Hollande in 2016. The victory of Mitterand over Giscard in May 1981. The student revolt against General de Gaulle in May 1968. The fall of France after the Nazi invasion in May 1940.
François Hollande has the lowest approval ratings in the history of the Fifth Republic and his own Socialists want to dump him for reelection next year when he faces Marine Le Pen of the National Front. Prime Minister Manuel Valls has survived a no-confidence vote but Article 49 has once again revived the Gaullist/gauchist schism in French politics a generation after the death of the general and Georges Marchais. It is too early to predict if Nicolas Sarkozy's centre-right will benefit from forcing and losing a no-confidence vote only a year before the next presidential election. Yet the impact of Hollande's labour laws on the French economy will be a game-changer in the dirigiste, Colbertist, Cartesian la belle France of 2016.
France's largest corporates can now negotiate with their trade unions for deals beyond the 35-hour work week. This could help French companies restructure, boost productivity, reduce costs and ignore industry or sector trade union deals. The labour reforms also makes it easier for companies to cut payrolls if revenues decline. After all, France's unemployment rate is 10 per cent and the despair in the banlieues is palpable.
Francois Hollande's legacy will be defined by his labour reform legislation long after the horrific images of terror attacks on Charlie Hebdo or Bataclan recede in memory. This is also a win for the European project since Brussels demanded labour reforms in exchange for a longer time period to fulfill the eurozone's budget deficit criteria.
As a student of French economics and a friend of an École nationale d'administration alum and global economic diplomat who happens to be Diane's grand-père, I wonder if a coalition of militant trade unions, neo-Marxist and even Trotskyite students and Socialist Party-bloc MPs will now escalate their protests via street demonstrations. After all, it is imprudent to ignore the lessons of the "événement" of 1968, 1870, 1848 and 1830, or even the great revolution and storming of the Bastille ignited by Camille Desmoulins speech in a Paris café on July 14, 1789. Political instability in France, the second-largest economy in the EU, will be an unmitigated disaster for the euro and global markets complacent about volatility shocks. I love Paris in the springtime but "sell in May and go away" (ideally to the beaches of the Bay of Angels in Nice or the Croisette in Cannes!) makes perfect sense to me. European equities has been a nightmare in 2016, as even the clowns in Magic Planet have learnt the hard way.
France Inc is not exactly thrilled with the new laws, since Hollande dropped the severance package cap in case of wrongful dismissal. I believe the historic events of the past week increase the odds that Alain Juppé will win the center-right's nomination and defeat both the Socialists and the National Front to become the next president of France in 2017. Juppé could well prove to be the French Thatcher, Reagan or Macri for the stock market. His programmes call for an end to the 35-hour workweek, a five per cent unemployment rate, lower corporate taxes, a rollback of the French welfare state and the sacking of 250,000 fonctionnaire (civil servants).
I was in Paris in 1995 in the Chirac era when Juppé's reform ideas for the welfare state clogged the Champs-Élysées with angry demonstrators. There is no doubt in my mind that Juppé will beat Le Pen in the first round to win Élysée Palace. This prospect alone could mean a 25 per cent bull run in French equities. But not now. "Attendez" is the French verb to wait and my strategy idea de jour.
Matein Khalid is a global equities strategist and fund manager. He can be contacted at email@example.com.