Navigating Tariff Uncertainty: Strategic Sectors for Resilience in a Slow-Growth France

France's economy in 2025 is navigating a delicate balancing act: fiscal consolidation, trade tensions, and a slowing global growth environment. Yet, amid these headwinds, certain domestic industries are emerging as undervalued opportunities, poised to benefit from government stimulus, structural reforms, and private investment. For investors, the challenge lies in identifying sectors that can weather macroeconomic volatility while capitalizing on policy-driven tailwinds.

The Fiscal Tightrope and Trade Risks

The French government has prioritized reducing its fiscal deficit, which is projected to fall from 5.8% of GDP in 2024 to 5.4% in 2025. This effort, however, comes at the cost of higher taxes on high-income earners, profitable firms, and carbon-intensive industries. Meanwhile, trade tensions—particularly with the U.S. and potential retaliatory measures from other economies—threaten to dampen exports, which account for 55% of France's economic output. The government's response includes structural reforms to boost competitiveness, such as streamlining services sector regulations and accelerating digital adoption.

Monetary easing, however, offers a counterbalance. The European Central Bank's rate cuts have driven housing and business loan rates to multi-year lows, creating a favorable environment for sectors insulated from trade shocks. This dynamic sets the stage for a strategic shift in investment focus.

Undervalued Sectors: Resilience Through Diversification and Innovation

1. Chemical Industry: Defensive Resilience

The chemical sector, represented by firms like Arkema (ARKM.PA) and Solvay (SOLB.BR), has adopted a defensive posture by stockpiling inventory to hedge against U.S.-China tariff risks. These companies maintain low debt levels and operate at valuations below historical averages. Arkema, for instance, trades at a 12x P/E ratio, significantly below its five-year average of 15x.

Investors should consider the sector's potential for upside if trade tensions ease or global demand stabilizes. The industry's focus on specialty chemicals and sustainable materials also aligns with long-term trends in decarbonization.

2. Information Services: Digital Transformation Mandates

Government-driven digitalization is fueling growth in the information services sector. Orange (ORA.PA) and Bouygues Telecom (BOUY.PA) are expanding 5G infrastructure and cybersecurity services, with Bouygues' capital expenditure plans unlocking new revenue streams. Orange's 18x P/E ratio reflects optimism about its role in France's digital future, though elevated valuations warrant caution.

The sector's resilience stems from its alignment with national priorities, including the Simplification Bill's regulatory reforms and EU-level digital adoption targets.

3. Construction and Infrastructure: Contrarian Value

Despite an eight-quarter slump, construction firms like Vinci (DG.PA) and Bouygues (EN.PA) are positioned to benefit from high-speed rail expansions and renewable energy grid projects. Vinci's EV/EBITDA of 8.5x is below its 10-year average of 10.2x, signaling potential for a rebound if policy execution improves.

Public infrastructure spending, supported by the European Green Deal and France's 2025 stimulus, is expected to drive demand for construction services. Investors with a long-term horizon may find contrarian value here.

4. Transport Equipment and Green Technology

France's transport sector is leveraging decarbonization mandates and EU rail expansion projects. Alstom (ALO.PA), a leader in hydrogen-powered trains and high-speed rail, has seen a 18% year-on-year increase in orders. The company's focus on green technology aligns with both domestic and EU climate goals.

Renault's (RNO.PA) pivot to electric vehicles (EVs) also presents opportunities, though its exposure to global supply chain risks requires careful hedging.

5. Luxury Goods: Export Diversification

Luxury conglomerates like LVMH (MC.PA) and Kering (KER.PA) are capitalizing on strong demand in Asia and the Middle East, with LVMH's stock rising 28% since early 2023. Despite U.S. tariffs, the sector's export diversification into high-growth markets has mitigated risks.

Investors should monitor currency volatility and geopolitical shifts, but the sector's structural demand from affluent consumers remains robust.

Strategic Recommendations for Investors

1. Sector Rotation and Hedging: Prioritize sectors with defensive characteristics (chemicals, information services) and hedge against currency risks via EUR/USD short positions.
2. Contrarian Bets: Target undervalued infrastructure and construction firms with strong policy tailwinds.
3. Avoid Overexposed Sectors: Steer clear of export-heavy industries like automotive and luxury goods until trade policies stabilize.

Conclusion

France's 2025 economic landscape is defined by fiscal caution and trade uncertainty, but it also presents opportunities in sectors adapting to structural changes. By focusing on industries aligned with digital transformation, decarbonization, and domestic demand, investors can navigate volatility while positioning for long-term resilience. The key lies in balancing risk mitigation with strategic exposure to policy-driven growth areas.