France's CAC 40 index: predictions for 2020
The French blue-chip index has risen 27 per cent this year, defying bearish predictions. Will the bull run continue in 2020? We look at the stock market forecast for the CAC 40 index in 2020
Encompassing designer handbags, aircraft engines and yogurt makers, the CAC 40 index is the home of France’s flagship companies and one of the main indicators of the country's economic health.
The CAC 40 index tracks the 40 largest French stocks based on their capitalisation on the Euronext Paris exchange.
It is similar to the Dow Jones Industrial Average as the most commonly used index to provide a broad view of market direction in France.
As France represents a fifth of Europe's total economy, the CAC 40 index can help traders understand where the European economy is heading.
It is also the most popular European index for foreign investors, thanks to the multinational reach of its listed companies. Here are our CAC 40 predictions for 2020.
CAC 40 forecasts for 2020
Designer bags and jets
The composition of the CAC 40 index is subject to a quarterly review. The industrial sector dominates, making up nearly a quarter of the companies. Real estate is the smallest segment.
Key companies in the index are luxury group LVMH, with a market capitalisation of €224.4bn ($248.8bn, £190.6bn) followed by cosmetics giant L’Oréal at €161.7bn and oil company Total at €144.7bn.
Other notable constituents are planemaker Airbus, food giant Danone and pharmaceutical company Sanofi.
“France has cool stocks and the CAC 40 is the most beautiful index in Europe,” says fund manager Marco Brancolini at BPER Banca in Milan.
“While Germany’s DAX is full of cyclicals and industrials, which are slowing down, and Italy’s FTSE MIB has many banks, the CAC is a well-balanced index, with everything from luxury and utilities to pharma, industrials, food and banks too.”
Despite bearish stock market forecasts at the end of 2018, the CAC 40 index is on course to close 2019 up 27 per cent.
On December 20, the index hit the symbolic 6,000-point level reached in July 2007, before the financial crisis – but it remains far off the all-time high of 6,944.77 in September 2000.
Amid a far-from-euphoric start to the year marked by Brexit talks, the yellow vest demonstrations in France and dissent between European states, France’s main index posted an impressive performance in 2019.
Daniel Larrouturou, deputy CEO of asset manager Diamant Bleu Gestion, says macroeconomics and strong company earnings helped support the CAC 40 index in 2019 as it recovered from a year low of 4611 points in early January.
Central bank policies have helped lift the economy, while the Federal Reserve helped market sentiment when it started to signal a possible rate cut.
CAC 40: What happened in 2019
Apart from a few sectors – notably automotive and construction – few CAC 40 index companies revised their targets downwards when they published 2018 accounts.
Since the start of the year, the CAC 40 index has been propelled by microchip specialist ST Microelectronics, up 94.5 per cent in the year to date, LVMH (up 56 per cent) , followed by electrical equipment maker Schneider Electric (up 55 per cent) and Airbus, up 56 per cent.
TrendFi analysts have pointed out that at a level of 18.9, the 12-month price-earnings ratio of the CAC 40 index has never been higher since the French firm began tracking it in 2004.
“Of the 40 stocks in the index, there are currently 11 with a forecast P/E of more than 20,” they said in a note.
“After an excessive undervaluation at the end of 2018, it seems that the market is on the verge of committing an excess in the other direction,” they added.
Investors could even agree to pay an average of 20 times the 12-month profits from CAC 40 index stocks, which would allow the index to go up to 6,200 points, TrendFi analysts said.
CAC 40 forecast in 2020
The current economic forecasts urge caution. In its latest business cycle update, Fidelity Investments has highlighted that France (alongside the US, Japan and South Korea) is late in its business cycle and among the nations closest to recession, which may not bode well for further CAC 40 index gains in 2020.
The main characteristics of “late-cycle” economies include slowing growth rates, tightening credit, weaker corporate earnings, contradictory policies, growing inventories and declining sales.
This view is backed by the Bank of France, whose latest forecast predicted that the French economy was likely to feel the headwinds of weak global trade in 2020, after strong domestic demand helped it resist the eurozone slowdown in 2019.
As a result, the central bank has cut its 2020 GDP forecast to 1.1 per cent from 1.3 per cent in September and warned that consumer spending, while still growing, will advance more slowly than expected.
Will the 2019 CAC 40 bull run continue?
Looking at specific sectors within the CAC 40 index, the dire outlook that many analysts had predicted for 2019 may materialise next year.
CAC 40 Investment outlook for 2020
Investors in luxury stocks such as Louis Vuitton-owner LVMH and Kering, which controls Gucci, enjoyed a spectacular year in 2019 as stellar stock market gains smashed bearish predictions.
Kering and Hermes International, maker of the iconic Birkin bag, have surged 41 per cent and 38 per cent respectively this year, while LVMH has soared 56 per cent as demand for handbags, dresses and Champagne defied social unrest in Hong Kong, protests in France and the US-China trade war.
After China’s economy posted its slowest GDP growth in decades during the third quarter – and with forecasters expecting a further slowdown – luxury stocks may not reach the dizzy heights of 2019.
Still, the CAC 40 index is likely to offer good returns in 2020, particularly in energy and industrial , as well as “discretionary spending” stocks, according to Barclays, which has included six French companies in its list of favourite stocks for 2020.
Building materials group Saint Gobain is well placed to benefit from the strong renovation market in France, while spirits company Pernod Ricard is likely to see growth in its three main markets – the US, China and India.
Airbus is set to gain from Boeing's woes, Barclays predicts, as it added it to preferred list cyclical stocks like hotelier Accor and oil company Total, the brokerage’s favourite energy stock in Europe thanks to its solid earnings in 2019.
A special mention goes to Danone, which Barclays rates as one of the best investment vehicles in Europe with a target price of €84, since the food giant is best positioned to gain from explosive growth in the plant-based market next year.
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