Investors in France Tap Luxury Goods and More

The French economy continues to recover from disruptions caused by the COVID-19 pandemic, but high interest rates and strained government finances continue to dampen consumer and government spending and growth.

On the positive side, tourists are returning in a big way, helped along by large sporting events such as the Rugby World Cup and the upcoming 2024 Summer Olympic Games.

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Meantime, France is home to several of the top luxury goods companies in the world. The ETF we look at here holds many of these outstanding businesses.

iShares MSCI France ETF  (New York symbol EWQ) tracks the performance of the largest publicly listed French companies.

The ETF holds a well-diversified portfolio of 63 stocks. Industrials account for 25% of its assets, while Consumer Cyclicals (19%), Consumer Defensive (11%), Healthcare (10%), Financials (10%), and Energy (8%) are other key segments.

The fund’s largest 10 holdings make up 57% of its assets. They are LVMH (Luxury Goods, 11.5%), TotalEnergies (Energy, 8.2%), L’Oreal SA (Cosmetics, 6.0%), Sanofi (Healthcare, 5.7%), Schneider Electric (Industrials, 5.3%), Air Liquide (Basic Materials, 5.2%), Airbus (Industrials,
4.6%), Hermes International (Luxury Goods, 3.6%), BNP Paribas (Financial, 3.5%), and Vinci SA (Industrials, 3.4%).

Some of the world’s top luxury goods retailers are held in the portfolio. Apart from those included in the top 10 above, Kering, Pernod Ricard, and Remy Cointreau are also among the fund’s holdings.

The ETF started up in March 1996 and has an MER of 0.53%. With an average of $20.3 million in units trading daily, the fund provides strong liquidity. It has a p/e of 12.1 based on the forward earnings of the stocks it holds.

France lets you buy into one of the world’s largest economies

France is home to 65 million people and produces an annual gross domestic output of $2.8 trillion, or a little more than 1/10th of that of the U.S. economy.

The country’s economy ranks among the 10 largest in the world, while its top industries include machinery manufacturing, chemicals, pharmaceuticals, agriculture, and tourism.

France ranked below par (33rd out of 64 countries) in the 2023 IMD World Competitiveness Ranking.

That’s because the country scored poorly on factors such as government and business efficiency, although it scored relatively well when infrastructure and economic performance were considered. Key negatives were the government’s tax policies, the poor state of public finances, and attitudes and values in the business environment. Key positives were the technological and scientific infrastructure.

France is One of the World’s Largest Trading Nations

The country places among the largest trading nations in the world and attracts the most tourists (see more on that below). The main export partners include Germany, Belgium, Italy, Spain, the U.S., the U.K. and China. Key export products are machinery, vehicles, electronic equipment, pharmaceutical products, and aircraft.

The election of Emmanuel Macron as France’s new president in May 2017 offered promises of a revival for a then-stagnant economy.

Macron launched an ambitious reform program with three key objectives: reduce government spending, reduce unemployment, and lower the corporate tax rate to improve the country’s global competitive position.

Based on the Macron government proposals, it was estimated that full implementation of the planned tax, labour, and product market reforms would have seen GDP growth increase. Unemployment was also likely to decline with the achievement of those targets. The government was in fact targeting a balanced budget by 2022. However, COVID-19 slowed the French government’s plans.

Gross domestic product dropped sharply in 2020 and, despite a strong recovery in 2021, is still barely above the 2019 levels. Government debt and spending ballooned, and the budget deficit is now twice the 2017 level.

However, despite COVID-19 devastation, the French employment situation has improved under the Macron government. The unemployment rate declined from 10.5% in 2016 to the current 7.4%, while employment has increased substantially despite the temporary loss of 600,000 jobs during the height of the pandemic.

The French economy is now forecast to grow by 0.8% in 2023 and by 1.3% in 2024. Notably, this is in line with the average annual GDP growth in the decade before COVID-19.

French government debt is expected to continue to level out at around 110% of GDP in 2023 after jumping in 2020. That rise was due to COVID-related support programs to stimulate the economy that resulted in sharply higher government spending.

The government budget remains in a deficit estimated at 4.8% of GDP for 2023 as government spending remains higher than government revenues.

Similar to other parts of the world, inflation has moved up but seemed to reach a peak of 7.0% at the end of 2022. Forecasts indicate inflation of 5.6% for 2023 and 2.5% for 2024.

Interest rates are set by the European Central Bank—the policy rate is now firmly positive at 4.5% compared to negative rates that prevailed for much of the past 10 years.

The tourists are returning to #1 destination France

Tourism is a major business in France. In 2019, 91 million international tourists visited the country while domestic travellers added another 152 million.

In fact, France is ranked as the most visited tourist destination in the world. International visitors come mostly from the U.K., Germany, Italy, Switzerland, and the U.S.

Chinese visitors have been absent from France for several years due to COVID-19 restrictions. However, these restrictions were lifted in January 2023, raising expectations that Chinese tourism will recover to exceed the 2.2 million visitors recorded in 2019.

France is home to a wide variety of cultural and recreational sites, which attract millions of visitors each year.

The most visited place in France is Disneyland Paris with 14.8 million visitors per year. This is followed by the Louvre Museum with 8 million visitors and the Versailles Palace with 7.7 million visitors. The Eiffel Tower receives 6.2 million visitors per year.

On a combined basis the revenue derived from tourism amounted to 174 billion euros, or 7.5% of the gross domestic product in 2019. The industry also employs, directly and indirectly, 1.5 million people—approximately 8% of the workforce.

The COVID-19 pandemic hit the industry hard, with a decline of 34% in revenues and a 54% decline in international tourists in 2020. But tourism recovered strongly in 2022 with most indicators pointing to arrivals and total spending in 2023 coming in at higher than pre-pandemic levels.

Sporting events, including the just-completed Rugby World Cup and the upcoming 2024 Paris Olympic Games, will also continue to provide a boost to tourism.

Notably, it looks like accommodation prices for the Île-de-France region around Paris are expected to increase sharply during the Olympics, as 11 million tourists arrive in the city.

The iShares MSCI France Index ETF is a sound choice for investors who want exposure to France.

Do you invest in France? Why or why not?