Macroeconomic Analysis of France as an Investment Opportunity

Submitted by:
Harshit Jain (20) Pooja N Joukani (22) K. Abhinay (23) Shashank Kanodia (24) Amit Kumra (26)

Group 4

FRANCE:

Is the largest west-European country, fifth largest economy and possesses the secondlargest Exclusive Economic Zone in the world Is the founding member state of the European Union and is the largest one by area Is a major power for several centuries with strong cultural, economic, military and political influence in Europe and in the world Enjoys a high standard of living as well as a high public education level Is the most visited country in the world, receiving 82 million foreign tourists annually Is the founding member of the United Nations, and a member of G8, G20, NATO, OECD, WTO, and the Latin Union

Macroeconomic Analysis of FRANCE as an Investment option

FRANCE:

Is one of the five permanent members of the UN Security Council Is a mixed economy which combines extensive private enterprise & state enterprise

Is a part of a monetary union, the Euro zone and of the EU single market
Was the world's sixth-largest exporter of manufactured goods in 2009 The fourth-largest importer of manufactured goods in 2009

Ranks 4th in the Fortune Global 500.

Macroeconomic Analysis of FRANCE as an Investment option

Current GDP : 1956.59 Billion (2010) GDP Growth Rate: 0.75%

(Source: Tradingeconomics.com,INSEE National Statistics)

Macroeconomic Analysis of FRANCE as an Investment option

Comparison of recoveries, current Against past average - GDP, euro area

(Source: European Economic Forecast)

Macroeconomic Analysis of FRANCE as an Investment option

Exports: 33016.0 Million Euros

Imports: 36812.0 Million Euros

(Source: The Economist)

Macroeconomic Analysis of FRANCE as an Investment option

Sector-wise contribution to GDP

Sector Percentage. (Major Contributors) Service 78.9 (Tourism, Transportation) Industry 19.3 (Aircraft, Equipments) Agriculture 1.8 (Grains, Wines, Spirits)

France is currently ranked 14th out of 169 countries in UNs HDI - 2010
Frances HDI trends based on consistent time series data Years 1980 1985 1990 1995 2000 2005 2010 Life Expectancy at birth 74.1 75.3 76.6 77.8 78.9 80.4 81.6 Expected years of schooling 12.6 13.0 14.0 15.7 15.6 16.2 16.1 Mean years of schooling 6.0 6.4 7.1 8.3 9.3 9.8 10.4 GNI per capita (PPP US$) 22513 23562 27026 28048 32011 33397 34341 HDI Value 0.711 0.731 0.766 0.807 0.834 0.856 0.872

( Source: UNs Human Development Report 2010)

Business Confidence: 98
Tax Reliefs: Frances research tax credit is the best in Europe

It covers 50% of R&D expenses the first year, 40% the second year and 30% for subsequent years up to 100 million (and 5% of expenses above this threshold) A powerful instrument for encouraging partnership research in France and Europe Expenses incurred on operations subcontracted to French and European publicsector research bodies are assessed at 200%, which amounts to a doubling of the tax credit All R&D expenses are taken into account

Macroeconomic Analysis of FRANCE as an Investment option

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Second-largest consumer market in Europe France is one of the most developed countries Market share of 23.3% of total investments in Europe Low initial costs of set up Major electricity needs satisfied from nuclear power A sovereign debt rating of AAA Revised GDP growth estimates from 0.75% to 1.4% Liberalization of Economy

Government spending equalled 52.3 percent of GDP. Governments dominance continues in major sectors of the economy. The top personal income tax rate is 40 percent. The top corporate tax rate is 34.4 percent The government subsidizes agricultural production.

We suggest the investor to invest in France with a long time horizon as there exists some volatility in the short term with slow growth during the initial period of investment.

Macroeconomic Analysis of FRANCE as an Investment option

Current Unemployment Rate: 10% (2010) The Finance Ministry predicted a total of 71,000 jobs have been lost in 2010

(Source: www.tradingeconomics.com)

Macroeconomic Analysis of FRANCE as an Investment option

France has 10% unemployment , 34% of whom have been out of work for one year
Increasing illegal immigration crisis France swings between two extremes: a two-tier society & short-term contracts

Only 9% of the workforce belongs to a union

Generation S France has Europe's highest rates of female employment (81% of women aged between 25 and 49 are in work) Elite industrial model High minimum wages

Macroeconomic Analysis of FRANCE as an Investment option

Can be availed by the French people even if they are not staying in France. There is not only income help, but very generous housing subsidy and energy bills payment and other benefits also. The amount of the daily allowance cannot be lower than 26.66 or higher than 75% of the daily reference wage The minimum period for the payment of benefits is 122 days and the maximum period 730 days for private-sector employees aged below 50, and 1,095 days for employees over 50
Public Expenditure as % of GDP 2004 1.63 2005 1.53 2006 1.34 2007 1.2 2008 1.14

Measure Year Full Employment Benefits Direct Job Creation Benefit Administration

0.23 0.08

0.18 0.08

0.20 0.07

0.20 0.07

0.15 0.05

(Source: www.oecdstats.org)

Extensive use of short-time work schemes

A More Flexible Labour Market A new Contract act

Macroeconomic Analysis of FRANCE as an Investment option

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Worlds third leading country in terms of hourly productivity (ILO) Productivity per worker, on both an hourly and an annual basis, is 20% higher than the European average

Has high unemployment levels of around 10% High minimum wages, high unemployment benefits and illegal immigration Rigid job-market rules

The French labour force is highly qualified and versatile and adapts easily to new methods of working
Frances education system free and open to all is recognized as one of the best in the world.

The non-salary costs and social security contribution of employing a worker are very high
Dismissing an employee can be difficult Restrictions imposed and heavy payroll taxes deter job creation

Therefore France is not a very attractive investment option considering the high unemployment levels and rigid labour market rules.

Macroeconomic Analysis of FRANCE as an Investment option

Current Interest Rate: 1 % (2010)

(Source: TradingEconomics.com; European Central Bank)

Macroeconomic Analysis of FRANCE as an Investment option

In the Euro Area, interest rate decisions are taken by the Governing Council of the European Central Bank (ECB)
In France, interest rates ceilings exist for all credit to consumers. These are calculated quarterly by the National Bank on the basis of the market rates for different categories of credits Low interest Rates and its impact Existence of Carry Trades

Macroeconomic Analysis of FRANCE as an Investment option

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French Governments plan of offering loans to the extent of 40 per cent of investment to Indian Companies willing to invest in France, at zero per cent interest rate The costs of living and doing business is also low Enough liquidity in the system and businesses can borrow money at cheap rates

A lower interest rate relative to those in other countries will tend to result in a decrease in the amount of funds flowing into France

The ECB has decided to start buying government bonds of weak euro-zone countries to prop up their funding efforts

Therefore, ceteris paribus, it is viable to set up in France as cost of capital is low and there is easy availability of credit.
However from an investment point of view, low interest rates only help carry trades for currency traders but it is not advisable to invest in France because of interest rate differential.

Macroeconomic Analysis of FRANCE as an Investment option

Current Inflation Rate: 1.59% (2010)

(Source: www.tradingeconomics.com, INSEE)

Macroeconomic Analysis of FRANCE as an Investment option

Inflation Rate in France is determined using Consumer Price Index (CPI) Inflation is below the ECBs 2 percent target due to : a. Food prices being almost stable b. Drop in Oil and commodity prices compared to historic highs c. Downturn in economic activity End of deflationary scenario due to price and wage dynamics remaining positive Inflation stickiness- detrimental to economic growth for two reasons: a. It harms Frances external competitiveness b. It leads to a loss of purchasing power
Macroeconomic Analysis of FRANCE as an Investment option

Consumer Confidence: -34 EUR

(Source: Tradingeconomics.com, INSEE)

Degree of optimism that consumers feel about the overall state of the economy Determines spending activity and if confidence is lower, consumers tend to save more than they spend, prompting the contraction of the economy.
Macroeconomic Analysis of FRANCE as an Investment option

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ECB unlikely to tighten Monetary Policy due to low inflation rate Enough liquidity in the system

Low consumer confidence level leading to reduced spending Present inflation rate in France is 1.59 % which is too low to depict effective demand

We conclude that an investor thinking of a manufacturing set up can proceed ahead with the investment in France but should not rely only on domestic consumption for its growth opportunities

Macroeconomic Analysis of FRANCE as an Investment option

Current Fiscal Deficit as a % of GDP: 8.3% (2010)

(Source: INSEE)
Macroeconomic Analysis of FRANCE as an Investment option

Parameters

Fiscal deficit as % of GDP 2010

Need for reduction in the fiscal deficit 2010-2020 8.6

Spontaneous growth after crisis

Growth that stabilises fiscal deficits 2.2

Required growth to reduce fiscal deficits 3.5

Percentage

-8.3

1.25

(Sources: DataStream, Natixis)

Maastricht Treaty & Stability and Growth Pact In 1992, the Maastricht Treaty implemented criteria for fiscal convergence between the potential EMU participants. These criteria required annual budget deficits to be held to 3% of GDP and the gross debt-to-GDP ratio reduced to 60% in order to ensure the avoidance of excessive borrowing by member states. More Focus on Social VAT

Macroeconomic Analysis of FRANCE as an Investment option

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New pension age Bill passed by the French Parliament Austerity Measures Increasing growth and reductions in public subsidies

Fiscal deficit figures of France are at alarmingly high levels of around 8% of GDP High government spending which is of the tune of 52% of the GDP taking into account the high government spending on unemployment benefits and pension benefits to senior citizens of France Govt. debt to GDP is around 77 percent

We conclude that for an investor wanting to invest in France this is not the appropriate time and would advice him to restrain till the fiscal deficit level falls to manageable levels for the French Government and as per the Maastricht Treaty (<3% GDP)

Macroeconomic Analysis of FRANCE as an Investment option

Current Value: 3860.16

(Source: www.tradingeconomics.com)

Macroeconomic Analysis of FRANCE as an Investment option

(Source: http://www.bov.com/filebank/documents/1-12_Gevit%20Duca.pdf)

Stock Market Capitalization To GDP Ratio is 74.4% for France

Macroeconomic Analysis of FRANCE as an Investment option

Ratio of Market Capitalisation to GDP

74.4 106.8 52.3

2009

2008
2007

The CAC 40- The benchmark French stock market index GDP and market capitalization of France is very small

The index gained 22 % after the recession hit France

French stock exchange operates with a cycle of 6-7 years The average PE of CAC 40 has been around 19 and the EPS is 200

Macroeconomic Analysis of FRANCE as an Investment option

(Source: http://www.forecast-chart.com/historical-cac-40.html)
Macroeconomic Analysis of FRANCE as an Investment option

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The P/E ratio has been around 19 which means the valuation is slightly on higher side Stock market capitalization/GDP for France is 74.4% which indicates that the market is fairly valued as compared to emerging economies like India, China, Brazil and Russia

The French president's approval rating has plummeted in the wake of growing discontent over his retirement reform plan.

An investor who wants to invest in France purely in terms of Equity investment via stock exchange route will have to wait till political certainty is achieved.

Macroeconomic Analysis of FRANCE as an Investment option

State control over several state-owned companies in the areas of transportation, energy, and communications (30 % of workforce is employed by the state) Pension Crisis extending the retirement age from 60 years to 62 years Nicolas Sarkozys declining popularity In mid-November France takes over the 12-month presidency of the G20, and in 2011 the G8 as well

Analysis:
- Uncertainty will prevail in France for some time as it prepares itself for the next Presidential Election in 2012 - These political uncertainties will have to be factored in before taking a call on investments being made in France - Based on the present political scenario we conclude that investor should not invest & should ideally wait till some political stability is achieved and there is a clear direction of policy

Macroeconomic Analysis of FRANCE as an Investment option

Classes and Caste

Too Top Down Language barrier Still believes in solidarity and social cohesion, in small farmers and local markets. The illegal immigration problem Youth Unemployment Ethnic strife due to former colonies separating out

Analysis:
France has not given a very positive signal towards all social groups. These factors along with possible language barriers have to be factored in while investing in France

Macroeconomic Analysis of FRANCE as an Investment option

Strong protection of property rights and a relatively efficient legal framework Same rules, regulations, rights, obligations and available State Aid for all companies whether they are French or not Foreign investment free of any administrative restrictions Streamlined administrative formalities Start-up Support Bureaucratic financial, regulatory, and accounting systems yet consistent with international norms Well developed capital markets - Foreign investors participate freely Secure contractual agreements & professional judiciary
Macroeconomic Analysis of FRANCE as an Investment option

Transparent regulations, but officials have wide discretion to impose unwritten performance requirements
Strong protection of intellectual property rights

No generalized screening of foreign investment, but acquisitions in some sensitive sectors require approval
Long payment cycle of up to 90 days for business transactions in effect of which, the buyer gets a free three month credit period

Relaxed visa rules to attract more Indian students to study there Analysis: We conclude that as far as legal parameters are concerned an investor can surely look out for an investment in France

Macroeconomic Analysis of FRANCE as an Investment option

Current Exchange Rate: 1= $1.36469

USD to 1Euros
(Source: Euro exchange rates in USD, ECB)

Macroeconomic Analysis of FRANCE as an Investment option

The French currency-Euro is the single currency shared by (currently) 16 of the European Union's Member States, which together make up the euro area Major reasons for adoption Euro Management of Euro: By the European Central Bank (ECB) and the national central banks which together compose the Eurosystem Flexible Exchange Rates

Macroeconomic Analysis of FRANCE as an Investment option

Currencies pegged to the euro: Some 56 countries around the world have adopted an exchange rate regime entirely or partly anchored on the euro as a safety measure
Impact of Euro on Financial Markets: i. Competition among the Private Sector str. ii. Competition b/w models of financial iii. Competition b/w regulators & legislators iv. Competition b/w Sovereign Issuers Reasons for decline in Euro: Greece Crisis, Oil price increase in 19992000, Structural weaknesses in European Economies, Changes in capital market activity & ECB policies

Macroeconomic Analysis of FRANCE as an Investment option

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The general trend of decline in the value of Euro favours exports and substitutes imports Due to existence of a single currency private competition has boomed which could significantly benefit its external competitiveness thus attracting foreign direct investments. The increase in competition has been very marked in sovereign debt markets which has delivered some of the most spectacular benefits to investors. Both the equity market and the private bond market have experienced unprecedented development over the past few years attracting foreign institutional investments.

The exchange rates are bilateral, so greater volatility in the $/euro rate, for example, causes problems for risk-averse investors on both sides of the Forex market Greater volatility in exchange rates due to the ECB policies as well has scared off risk averse investors.

We conclude that an investor looking out for an investment in manufacturing set up can proceed with his investment as a depreciated currency (Euro) works in the favour of exports by virtue of making French goods cost competitive and for an investor looking for an investment in capital markets & Forex market in particular we would advice him to practice restrain on account of prevailing exchange rate volatility.

Macroeconomic Analysis of FRANCE as an Investment option

Frances economic freedom score is 64.2, making its economy the 64th freest in the 2010 Index of Economic Freedom
France is attractive not only for North American and Asian investors, but also for European partners who accounted for 68% of foreign job-creating investment 23,000 foreign companies currently have a base in France, employing over 2.8 million people, double the figure only 10 years ago 460 billion of public-private investment anticipated by 2020 Infrastructure Support: France has one of the longest and safest road networks in Europe, TGV high-speed trains and Five of Europes main ports .

Macroeconomic Analysis of FRANCE as an Investment option

Research and Partnerships: 71 innovation clusters , Financial and tax support for R&D activities
Sustainable Development: Frances goal is to remain a world leader in de-carbonized energy by maintaining its lead in nuclear energy and developing its renewable energy capacity. France has devoted 21% of its economic stimulus plan lending to green growth France is the host country for the ITER (International Thermonuclear Experimental Reactor) project, which involves designing and building an experimental fusion reactor capable of producing virtually clean and unlimited energy for industrial use

Macroeconomic Analysis of FRANCE as an Investment option

INDIAS ENERGY CONSUMPTION (PROJECTION)

At last count, Indian companies had invested an aggregate 363 million in France creating 8,000 jobs. President Nicholas Sarkozy is due to visit India in Dec 2010. During Sarkozys visit, India and France are likely to sign a $2billion defence deal

(Source: Draft Report of the Expert Committee on Integrated Energy Policy, Planning Commission, Govt. of India)

Considering Indias high energy consumption needs in the future, France is going to play a key role in supply of nuclear reactors and fuel, given its expertise in the field. It was the first nation to sign a deal with India after India obtained a waiver from the Nuclear Supplies Group. Indian companies therefore must be on the lookout for investment opportunities in the nuclear energy sector.

Macroeconomic Analysis of FRANCE as an Investment option

The present values of macroeconomic factors namely interest rates, inflation and exchange rate are pretty conducive for setting up a manufacturing plant in France, particularly an R & D centre wherein the French government provides a lot of tax reliefs but at the same time an investor needs to exercise caution on account of high fiscal deficit and high unemployment
Better targeted private R&D expenditure will also stimulate total factor productivity, improve the competitive position of the country and strengthen the labour market Fiscal deficit although very high at around 8 percent of GDP this year, is targeted to fall to 3 percent by 2013

Macroeconomic Analysis of FRANCE as an Investment option

France provides very good infrastructural support which in turn is conducive for setting up of a business in France and moreover as the global economy rebounds there is going to be an increase in tourist inflows and by virtue of it being the most preferred tourist destination, it would help the French economy or rather GDP to improve further
Although social security benefits are expected to slow down in line with unemployment benefits as the labour market is set to deteriorate less sharply than in 2009, Frances high benefits are detrimental and inefficient utilization is one of the main bottlenecks of the French economy.

Macroeconomic Analysis of FRANCE as an Investment option

For an investor aiming for capital investments through stock market investments we would advice them to practice restrain as there exists a foreseeable political instability and negative interest rate differential which may erode his wealth in short to medium term Therefore we conclude that investor with a short term time horizon should not invest in France whereas an investor who has a horizon of greater than 3 years should invest in France by way of a manufacturing set up and not in the stock market or generally available financial instruments

Macroeconomic Analysis of FRANCE as an Investment option

www.indexmundi.com www.economist.com www.tradingeconomics.com www.economictimes.com www.x-rates.com www.wikipedia.org www.ecoworld.com/energy-fuels/nuclear-power-in-india.html INSEE - National Institute of Statistics and Economic Studies - www.insee.fr/en European Central bank - www.ecb.int/ Report released from the Invest in France Agency (IFA). The report, entitled, "2010 France Attractiveness Scoreboard," Heritage Foundation - 2010 Index of Economic Freedom United Nations Human Development Report, 2010 Macro structural bottlenecks to growth in EU Member States - Directorate-General for Economic and Financial Affair - EUROPEAN COMMISSION European Economic Forecast - Spring 2010

Macroeconomic Analysis of FRANCE as an Investment option