Mais Oui, Buy France

09/03/2008 12:00 am EST


Carlton Delfeld

Editor, The La Jolla Letter and Pacific Gains

Carlton Delfeld, editor of Chartwell Advisor Global ETF Report, says big changes are afoot in France.

France may seem an odd pick in this investment climate. The cost of living has become something of a French obsession in the face of a slowing economy and rising inflation, especially in petrol and food prices. Gasoline and diesel demand fell by 10% just last month. Consumer confidence has hit record lows in recent months prompting Danone, the French food company, to disclose on Friday that of the 48 countries it monitors for consumer confidence, France ranks 44th.

But iShares MSCI France (NYSEArca: EWQ) has a number of factors working in its favor. France’s President Nicolas Sarkozy got off to a blundering start but has recently regained some momentum.

Recently, Christine Lagarde, France’s finance minister, rammed through a “modernization of the economy” law, which slashes red tape for entrepreneurs and increases competition in the moribund retail sector. The retirement age is also being raised by a year and companies will be allowed to negotiate working time directly with employee representatives to permit more than a 35-hour week.

Unemployed people who refuse more than two job offers will face penalties. Another good sign: Cargo handling is being transferred to the private sector in a sweeping reform of ports, a union stronghold. Keep in mind that ten of the largest European companies are headquartered in France.

Consequently, here are my reasons for the selection of iShares MSCI France:

1. The recent policy changes outlined above signal that France is moving in the right direction.
2. Even if the French economy stagnates, its stock market is dominated by leading multinationals able to search for growth around the world. Ten of Europe’s largest 40 multinationals are based in France.
3. On our relative valuation tables, France is looking good, trading at 5.4x cash flow and 1.54x book value.

Don’t expect a near-term pop in EWQ, but low valuations coupled with policy reforms will attract global equity managers’ interest. The risk factor: moderate with low valuations offering some downside risk protection. (It closed at $TK Tuesday—Editor.)

Lastly, I offer this tip: A collection of country ETFs may be a better play than the leading MSCI EAFE Index ETF (NYSEArca: EFA) that has 45% of its basket in the UK and Japan.

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