Why investors should care about French “yellow vests” protest

What is the Gilets Jaunes movement about?

The Gilets Jaunes are a mostly spontaneous movement that appeared in October, largely among the inhabitants of medium and small towns, initially to protest against the planned rise in gasoline taxes. The Macron presidency was largely caught off-guards and, as this movement was orchestrated neither by opposition political parties, nor by trade unions, the government has had a hard time identifying partners to negotiate with. Protesters’ demands have progressively extended well beyond the gasoline tax issue (the planned hike was cancelled by the government anyway) turning to address a greater number of grievances, related to purchasing power and social issues. Beyond often confused and sometimes contradictory demands, the Gilets Jaunes share the feeling that inhabitants of medium and small towns (who are more car dependant than urban dwellers) are negatively affected by globalisation and a declining level of public services. They also share a distaste for Macron’s decisions and style, as he is seen as a “President of the rich” (an expression often heard), embracing this very globalisation that is seen as benefitting mostly the relatively well-off inhabitants of large cities. A paradox of this movement is that most protesters seem to want both lower taxes and a higher level of social transfers and public services. Opposition political parties initially voiced some sympathy, but became a lot more prudent when protests were accompanied by increasing violence. Non-mainstream (far-left and far-right) parties and some trade unions continue to show sympathy, although they cannot be described as part of the movement and the Gilets Jaunes show a lot of distrust for all politicians in any case.

What are the implications of President Macron’s concessions on French finance?

The government did not give in to one of the key demands of some Gilets Jaunes, which was the reinstatement of the wealth tax on financial assets (it was removed by President Macron last year, instead limiting its application to real estate wealth), which could have had implications on the financial industry. However, in his December 10 intervention, the President stressed the necessity for international corporations active in France and for leaders of French corporations to pay taxes in France, with precise measures yet to be detailed. More generally, the necessity for the Macron government to devote more attention to small towns, may take away some energy that was initially directed at improving the status of Paris as a global financial city. Due to the rising uncertainty and doubts over the reform momentum, there could also be less appetite for international finance leaders to locate or relocate activities in France, notably against the backdrop of Brexit. Depending on the measures, yet to be announced, to offset some of the concessions made to the Gilets Jaunes, the French public deficit could also be well above 3% of GDP next year (it was initially planned at 2.8%, slightly higher due to the temporary combined effects of schemes intended to reduce corporations’ social contributions). However, if the concessions stop here and the recovery continues, the deficit should still be on a declining path into 2020.

With an investment perspective, do you see any impact of the recent protests on the French equity market? What are the perspectives for the market?

The French retail sector is most affected by the protests. Many commercial and luxury brands had to close their stores for the 3rd Saturday, just ahead Christmas period. Footfall in malls in France was down 17% on Saturday December 8, after a 14.3% fall on November 24 and 12.7% fall on December 1. Concessions companies are getting hurt as well. The protests started around November 17 and should negatively affect traffic in Q4 as several toll-gates have been blocked by protesters, some equipment has been damaged (repair cost should be covered by insurance) and also traffic flows have been slowed in some sections. We assume -15% traffic from Nov 16 to Dec 31 due to the “yellow vest” protests. Looking ahead, one of the key drivers to assess the French equity market in the coming months, is the evolution of consumer confidence. Announced measures could boost purchasing power and this could reinforce our positive view on French consumers. In our view, in 2019, purchasing power will record its strongest growth since the financial crisis, very likely above 2% y/y. France is cutting taxes and spending some money to get pro growth supplyside reforms through and this could be positive for the market. On the other hand, the market will increasingly call into question Macron’s ability to legislate additional pro-growth reforms, beyond the ones he has already delivered.

Hence, selection will be key to exploit these new market dynamics. We believe it is too early and risky to return to positions on food retail names, as consumer confidence needs to be restored first. On retail, investors should favour names with a multichannel business model that have been less impacted by recent protests. Other opportunities can be found in aeronautic stocks (strong visibility of earnings and structural tailwind), selectively in luxury brands that either benefit from Asian exposure (tourism and local sales dynamism) or that have implemented sustainable growth strategies, also through M&A.