French Stocks Vulnerable to Possible Tax Increase, Barclays Says

(Bloomberg) - Under-performing French stocks are facing further pain as the government considers tax hikes on blue-chip companies to plug a spiraling budget deficit, Barclays Plc strategists said.

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Barclays' warning comes as Michel Barnier is set to face parliament on Tuesday for the first time as prime minister to deliver a make-or-break speech outlining how he plans to regain control of France's public finances.

Raising the country's corporate tax rate to 33.5% from 25% on firms with more than €1 billion ($1.1 billion) in revenue would lower the 2025 earnings per share growth of the benchmark CAC 40 index by about 2.5 percentage points, a Barclays team led by Emmanuel Cau said in a note.

This would pull the consensus for EPS by analysts down to 6.9% from 9.4%, they estimated. According to French daily Le Monde, which reported the possible corporate tax hike, the government is also weighing fresh levies on share buybacks and energy companies.

"Although French stocks have underperformed recently, they still look too high," the Barclays strategists said, noting the negative impact of a rise in the cost of financing French sovereign debt.

The premium investors demand to hold French government bonds over neighbor Germany — a gauge of the country's debt risk — has climbed to around 76 basis points, up from less than 50 basis points prior to French President Emmanuel Macron announcing snap elections in June.

Last week, France's bonds were briefly priced as riskier than those of Spain for the first time since 2007, a symbolic reversal pointing to the extent of its financial-market woes.

Weighed down by the ongoing political crisis, the CAC 40 index in Paris is up only a meagre 1% so far in 2024, while the pan-European Stoxx 600 has gained 9.3%.

The government is also considering a potential cut to a tax credit for research, according to local media reports. That could see an EPS hit for a wide range of companies, such as jet-maker Dassault Aviation SA, defense group Thales SA and luxury bag maker Hermes International SCA, according to Thomas Zlowodzki, head of equity strategy at Oddo BHF.

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