Unlocking France's Resilient Sectors: Investing in Inventory-Driven Growth Amid Fragile Demand

The French economy's Q1 2025 GDP report reveals a paradox: a nominal recovery (+0.1% qoq) fueled by inventory accumulation, while domestic demand stagnates and exports falter. Beneath the surface, however, lies a mosaic of opportunities in sectors defying the malaise. For investors, this is a call to target chemicals, information services, and a nascent construction rebound, while strategically hedging against trade headwinds. Here's how to capitalize.

The Inventory Play: Chemicals as a Hidden Catalyst

The +0.5 percentage point GDP boost from inventory changes masks a strategic bet. Chemicals firms like Arkema (ARK.PA) and Solvay (SOLB.PA) drove this buildup, stockpiling ahead of U.S.-China tariff risks. Their warehouses now hold latent value: as trade tensions ease or demand rebounds, these inventories could fuel a second-half sales surge.

Investors should prioritize chemical companies with global supply chain flexibility and exposure to niche markets (e.g., specialty polymers, industrial gases). While export-sensitive sectors like automotive struggle, chemicals are insulated by domestic demand and niche pricing power.

Information Services: The Quiet Growth Engine

While overall investment slumped (-0.2% qoq), services sector investments surged +0.9%, led by information and communications. Firms like Orange (OR.PA) and Bouygues Telecom (ENGI.PA) are capitalizing on 5G rollout delays turned opportunities. With France's digital transformation mandate and corporate IT spending resilience, this sector is a counter-cyclical gem.

Construction: Bottom-Fishing in a Bearish Market

Construction's eighth straight quarterly decline (-0.8% qoq) has priced in pessimism. Yet, select plays merit attention. Companies like Vinci (DG.PA) and Bouygues (ENGI.PA) dominate infrastructure projects tied to government long-term plans (e.g., high-speed rail, renewable energy grids). While short-term pain persists, valuations for construction equities are near multi-year lows—a contrarian entry point.

ETF Exposure: EWQ's Sector-Specific Edge

The iShares MSCI France ETF (EWQ) offers a leveraged play, with 36% exposure to consumer goods and industrials (including chemicals) and 18% to communications services. Its underweight in autos (-6% of portfolio) and overexposure to domestic-facing sectors aligns perfectly with the “resilient sectors” thesis.

Hedging Trade Risks: A Pragmatic Approach

To mitigate export headwinds:1. Diversify into domestic plays: Focus on chemicals (inventory-driven) and IT services (less export-reliant).2. Currency hedging: Pair EWQ with short EUR/USD positions to offset franc weakness if trade disputes escalate.3. Avoid auto/steel stocks: Sectors like Renault (RENA.PA) and Eramet (ERA.PA) face direct U.S. tariff threats.

The Bottom Line: Act Before the Cycle Turns

France's Q1 data is a false-bottom setup. While GDP stagnation dominates headlines, chemicals, information services, and construction are quietly laying groundwork for a recovery. The inventory buildup is a canary in the coal mine—signaling pent-up demand. Investors who act now, targeting EWQ's sector strengths and hedging trade risks, position themselves to capture the rebound when it comes.

The clock is ticking. The inventory cycle won't wait forever.