Navigating France's Sectoral Divergence: Opportunities in Construction and Pricing-Power Manufacturers Amid a Stable Business Climate

The French Business Climate Composite Indicator (BCCI) has stabilized at 99, nearing its long-term average of 100, but beneath this surface lies a stark divergence across sectors. While manufacturing and construction are rebounding, services and employment remain sluggish, creating a landscape ripe for strategic sector-specific allocations. Investors should focus on underweighting services and temporary work agencies, while overweighting construction firms and manufacturers with pricing power—all while monitoring near-term risks tied to weakening employment sentiment.

The BCCI: Stability Amid Sectoral Shifts

France's economy has avoided a sharp downturn, with the BCCI holding steady near 99—a recovery from April's dip to 96 but still below the 100 threshold. This stability masks significant disparities:

• Manufacturing: The sector's climate has surged to 99, nearing its long-term average, driven by improved production and inventory balances. Firms in automotive, aerospace, and industrial equipment are leveraging global demand, particularly in sectors with pricing power (e.g., luxury goods, high-tech machinery).
• Construction: After hitting a low of 97 in May, sentiment rebounded to 101 in June, buoyed by government infrastructure projects like the France Railway Network Redevelopment Program (€1.4 billion by 2030) and renewable energy investments. This sector offers long-term value, as construction activity aligns with the EU's green transition goals.
• Retail: Bouncing back from a 95 trough in March, the sector reached 98 in June, benefiting from summer sales and resilient consumer spending. However, it remains vulnerable to inflation and supply chain bottlenecks.
• Services & Employment: Services dipped to 98, while the employment climate lingered at 95—below its 100 average for the 12th consecutive month. Weakness in hiring intentions, particularly in sectors like hospitality and logistics, underscores cautious corporate outlooks.

Investment Strategy: Where to Play and Avoid

Overweight Construction and Select Manufacturers
Construction firms with exposure to public infrastructure projects—such as Vinci, Bouygues, and Eiffage—should benefit from government spending on transport and energy networks. Similarly, manufacturers in niche, high-margin segments (e.g., premium machinery, medical devices) can sustain pricing power despite inflationary pressures.

Underweight Services and Temporary Work Agencies
The services sector's fragility—driven by weak demand in tourism and professional services—warrants caution. Temporary work agencies, such as Adecco (ADEN.PA), face headwinds from reduced corporate hiring, making them speculative plays at best.

Near-Term Risks vs. Long-Term Value

• Employment Sentiment: The 95 employment climate signals lingering hesitancy in workforce expansion. A further decline could dampen consumer and business confidence. Monitor the INSEE employment balances for shifts in hiring plans.
• Global Demand: Manufacturing's recovery hinges on sustained demand from Asia and the U.S., which faces its own economic slowdown risks.

Valuation Plays: Sectors Near Historical Averages

• Construction: At 101, its BCCI is now above the long-term average, but valuations remain attractive due to undervalued land assets and project pipelines.
• Manufacturing: Near 99, this sector trades at multiples below its 5-year average, offering upside if global demand stabilizes.

Conclusion

France's economy is a tale of two markets: opportunities in construction and pricing-power manufacturers versus caution in services and temporary labor. While near-term risks loom, the stabilization at BCCI 99 suggests a base for selective investments. Investors should favor sectors aligned with structural trends—infrastructure and premium manufacturing—while avoiding those exposed to cyclical weakness. As the French economy navigates this divergence, patience and sectoral precision will reward the discerning strategist.

Stay vigilant on employment data and policy shifts, but don't overlook the undervalued gems in France's industrial backbone.