French stocks are pressuring widely held equities indexes. Should you buy the dip?

By Christine Idzelis

Underperformance of French equities 'goes back even further than 10 years,' cautions DataTrek

French stocks have taken a beating on election worries, dragging down popular equity indexes focused on countries outside the U.S.

"While French stocks may be small fish in the global market ocean, they are a good deal larger when you put them in the 'rest of world' pond," said Nicholas Colas, co-founder of DataTrek Research, in a note emailed Monday. "Political uncertainty in Europe's second largest economy is the last thing the continent's stock markets need just now."

The influence of French equities is measurable in many widely held indexes, including those tracked by the iShares Core MSCI Europe exchange-traded fund IEUR; the iShares MSCI EAFE ETF EFA, which focuses on developed-market equities excluding the U.S. and Canada; and the iShares MSCI ACWI ex U.S. ETF ACWX, which provides exposure to global stocks outside the U.S., the DataTrek note shows.

All three exchange-traded funds dropped last week amid uncertainty surrounding the snap parliamentary election called by French President Emmanuel Macron - although their slide wasn't as steep as the plunge by the iShares MSCI France ETF EWQ, according to FactSet data.

Investors may be considering buying French stocks after their "big hit" last week, according to DataTrek, but U.S. large-caps remain the top long-term option in the global equities market.

"French stocks chronically underperform U.S. equities, so we would be careful trying to pick a bottom" for them or the indexes in which they have a large concentration, Colas said. "French equities' underperformance goes back even further than 10 years."

Shares of the iShares MSCI France ETF tumbled 9.3% last week, their biggest weekly drop since the stretch ending March 4, 2022, according to FactSet data. The pummeled fund's shares finished Friday down 3.9% in the year to date.

Read: France ETF tumbles into 2024 losses as snap French election looms

The ETF, which tracks an index of French equities, has struggled since Macron's unexpected call on June 9 for a snap election in France after his party's defeat by the country's far-right National Rally in the European Union's parliamentary vote. Voting in France's parliamentary election is scheduled for June 30 and July 7, according to the Associated Press.

Equities in France had a weight of around 16% in the iShares Core MSCI Europe ETF as recently as June 14, according to data on BlackRock's website. The iShares MSCI EAFE ETF had a slightly more than 11% exposure to France as of the same date, while the country's weighting in the iShares MSCI ACWI ex U.S. ETF was slightly more than 7%, data from BlackRock's website show.

Shares of the iShares Core MSCI Europe ETF dropped 5.1% last week, while the iShares MSCI EAFE ETF slid 4.2% and the iShares MSCI ACWI ex U.S. ETF fell 2.8%, according to FactSet data.

Shares of all three ETFs ended Friday with 2024 gains of more than 3%, remaining in positive territory, while the iShares MSCI France ETF struggled in the red. Still, they're trailing far behind the S&P 500 index SPX, a gauge of large-cap stocks in the U.S.

The S&P 500 rose last week, bringing its 2024 climb to 13.9% this year through Friday.

Meanwhile, the iShares MSCI France ETF is trading below its levels seen in July 2007, while the S&P 500 has soared since then, said Colas. The S&P 500 is dominated by Big Tech stocks, whereas the biggest weight in the iShares MSCI France ETF is luxury-goods company LVMH, according to DataTrek.

Luxury goods vs. Big Tech

"As is the case in most European equity markets, French public companies simply don't have the same heft as their American counterparts," said Colas, who pointed to LVMH's market value as just a sliver of the market capitalization of U.S. tech giant Microsoft Corp.

Microsoft (MSFT) has the largest market value among U.S. companies, at almost $3.3 trillion, while LVMH (FR:MC) is valued at around $385 billion, according to FactSet data, at last check.

While "one can argue about whether the value of the world's largest luxury-goods company is really just a rounding error to the value of one of the world's best-known tech companies," Colas said that "markets have spoken," and clearly it is.

"U.S. large caps are the best long-term investment option in global equities," he wrote, "and everything else is essentially just an occasional trade off a cyclical/recessionary low."

-Christine Idzelis

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06-18-24 0621ET

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