View from City Road: France overloaded with great expectations

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The Independent Online
Anyone surprised that the price at which the French banking giant BNP is being privatised has turned out to be lower than expected has forgotten the first lesson of selling state assets: massage expectations upwards beforehand all the better to spring a pleasant surprise later.

This approach also improves the punter's chances of a quick profit, encouraging a purchase of the next privatisation stock too. Since the French government hopes to put at least one and possibly two more groups up for sale before Christmas - probably Rhone-Poulenc, the chemicals group, and Elf Aquitaine, the oil company - creating the right mood is important.

If anything, though, the trick backfired yesterday. Shares in Rhone-Poulenc were the biggest fallers on the Bourse, dropping 4 per cent on worries that the government might sell the already part-privatised group at a bargain basement discount to its current price.

As far as BNP is concerned, the ploy was unnecessary. Demand from institutional investors has been high, as bank investors are as able as the next person to look through the gloom of this year and next. BNP has been widely rated a recovery stock - and a buy at anything under Fr270 a share, compared with the Fr240 offer price - on the basis of an expected sharp improvement in profits and dividends in 1995 and 1996.

However, a word of caution is needed. Since the virtual collapse of the exchange rate mechanism, the French market appears to have grown wings. French equities are now the most expensive in Europe, trading at more than 25 times current earnings, a considerably more demanding multiple than London's 18 times. Indeed, the CAC-40 index of leading shares is predicting a 45 per cent rise in profits in 1994, with financial stocks supposed to produce a hefty 78 per cent increase.

The expectation is that next year there will be a sharp bounce from the recession and/or cuts in interest rates to push the CAC-40 ever onward and upward. Neither is a safe bet.