- The deep spending cuts of the new budget will likely exacerbate the already weakening economic outlook
- Analysts estimate that the increase in taxes could hit CAC40 2025 EPS by up to 9%
- Index currently trading at a premium to its P/E doesn’t reflect downside risks. Rich skew favours put spreads
The French government has announced the budget for next year, targeting EUR60.6bn of fiscal efforts to decrease the deficit from 6.1% to 5% in 2025 (3% by 2029), with spending cuts amounting to two-thirds of the package and one-third relating to increased taxation on corporates, energy and the wealthy. However, uncertainty remains as to whether it will be possible to pass the proposal through parliament as the planned measures could conflict with the agendas of the coalition’s parties and, although a deficit reduction would be welcomed, deep spending cuts will likely exacerbate the already weakening economic outlook and the government’s ability to achieve its goal without undesirable second-order effects on the underlying economy. The debate is expected to start on 21 October, with the first vote on revenues on 29 October and the final vote on the full budget on 19 November.
French blue-chip stocks are expected to be hardest hit by the tax hikes, raising c.EUR 13.6bn of extra revenues for the government in 2025 from a mix of taxes on buybacks and an increase in the corporate tax rate from 25% to 30.15% and 35.3% for companies with turnovers above EUR1bn and EUR3bn, respectively. Analysts estimate that this could lead to up to a 9% hit to the CAC40 EPS for 2025, with low-margin sectors like telcos, utilities and energy the most affected. The CAC40 is currently trading at 14.3x P/E and at a 4.7% premium to its long-run average of 13.7x, and although an optimist would argue it trades at depressed levels relative to other regional European indices, given the downside risks in the macro environment on the back of deep fiscal cuts, a pessimist could argue that current price levels don’t reflect the potential hit to earnings and a further P/E rating contraction. One could also argue that the recent weakness in French PMIs, which dropped to 48.6, suggests a rather optimistic growth forecast of 1.1% for both 2024 and 2025, risking further missed targets.
In terms of volatility, CAC vol is trading above SX5E with a relatively expensive put skew, swaying our thoughts of playing downside via Mar25 7400/6800 Put Spreads costing 1.4% of spot (Spot ref 7583, Fut. ref 7677). Should the spot price tick through our price target at expiration, the strategy would return c.5.5x on the premium employed.