Investing: French Elections Test Attitudes Toward Globalization

France has benefited more than almost any other country from the process called globalization. The country's big surpluses of trade and investment, and ultra-successful multinational businesses, show how much its economy gains from the unfettered flow of capital, labor, goods and services.

Globalization is nevertheless detested more in France than almost anywhere else. The French, who do not suffer from undue modesty about their reasoning powers and who laud their intellectuals much as citizens elsewhere fawn over rock stars and athletes, seem unable to grasp the idea that free trade makes them wealthier.

The presidential election campaign has done little to change that. Nearly all of the candidates, including the two survivors who will face off in balloting this weekend, have touted their anti-globalization credentials. That has been necessary to curry favor with voters, who distrust free markets and prize the so-called French model of high taxes and welfare protection, extensive state provision of services, and heavy regulation of business.

"The French are big beneficiaries of the trend in globalization, but anything which is perceived to put the French model at risk provokes some sort of reaction," said Harry Hartford, president of Causeway Capital Management, a Los Angeles firm.

The Socialist candidate, Ségolène Royal, probably means what she says, but her opponent, the right-leaning, reform-minded Nicolas Sarkozy, is likely to be crossing his fingers and toes when he expresses reservations about an integrated global economy.

Sarkozy, the top vote-getter in the first round of elections on April 22, is the preferred candidate of business and, no doubt, of investors. William Davies, head of European equities at Threadneedle Asset Management in London, predicts a rally in French stocks if Sarkozy prevails. At the same time, Davies tried to calm those who may be apprehensive about a Socialist triumph.

"A Royal win would not be the end of the world," he said in a note to investors. "French stocks would probably suffer a brisk sell-off in the short term, but after a year or so, as the reality dawns that her radical ideas are not working, a return to more neutral policies is probable."

A market decline and a year of status quo dirigisme may not be the end of the world, but it does not sound like a pleasant one for investors.

But a France led by Sarkozy might not be such a paradise, either, at least not at the start. Some see him as a Margaret Thatcher 2.0, despite his efforts to look like a friend of the welfare state. If he wins and tries to overhaul the French economy and society, there is likely to be firm resistance, said Alan Brown, head of investment at Schroder Investment Management in London.

"If he is for real, we should be in for some spectacular strikes, at which the French excel like no other," Brown said.

If Sarkozy were to come out on top, he added, "it could indeed change the corporate climate," but not necessarily for the big-name French multinationals that have already discovered better weather elsewhere. Brown and Hartford agree that the companies with a more provincial outlook have the most at stake.

"A reform program is more likely to impact companies that are more exposed to domestic regulations and legal requirements," Hartford said.

So while he admires such multinationals as the drug maker Sanofi Aventis, the luxury goods maker LVMH Moët Hennessy Louis Vuitton, and such stalwarts of heavy industry as Air Liquide, Lafarge and Schneider, he does not think that Sarkozy would do them much good or that Royal would hinder their progress.

Better bets on a Sarkozy victory, he said, are companies with heavy sales and employment in France, especially "entities subject to the greatest amount of regulation," like Électricité de France, Air France and Aéroports de Paris.

Other labor-intensive, domestically focused companies whose stocks should thrive during a Sarkozy administration include the food retailers Carrefour and Casino and purveyors of leisure activities like Club Méditerranée and Euro Disney.