Investors look to France's 'Macronomics' to beat benchmarks

By Leigh Thomas

PARIS (Reuters) - Investors are banking on an economic renewal under President Emmanuel Macron to beat broader European benchmarks, sparking a flood of cash into funds offering exposure to France.

Billions of euros have flowed into French assets since Macron's decisive victory over far-right opponent Marine Le Pen last May on the back of a pro-business reform agenda. There is little sign of those flows relenting any time soon.

"We've got people who are asking how to play 'Macronomics' in their portfolios," Amundi chief investment officer Pascal Blanque said. "In all of the institutional investors' European portfolios we see a French segment."

Amundi, Europe's biggest asset manager with 1.4 trillion euros ($1.74 trillion) under management, saw inflows of 968 million euros into its exchange traded funds offering French exposure last year, with the lion's share coming after the election.

In contrast, one billion euros were pulled from ETFs in German stocks.

More than 90 percent of the flow into French exposure went into ETFs tracking the CAC 40 index of leading French shares . The rest went into ETFs shadowing the broader MSCI France index (CF1.PA).

U.S. investors are looking to get in on the action, judging by flows into the biggest New York-traded ETF focused on France, the iShares fund tracking the MSCI France index (EWQ). Its total net assets have surged from $323 million a year ago to more than $830 million as of Wednesday.

"In France, the reforms are going down without too much trouble," Lyxor senior strategist Lionel Melin said. "That could lead French shares to outperform the euro zone benchmark."

Though still early, so far this year French shares (.FCHI) have slightly lagged the broader euro zone benchmark index , buoyed by positive global sentiment for equities.

Not only are investors rushing into French stocks, they are increasingly doing so without hedging against downside risk, judging by the options market, where the volume of bets that the CAC 40 will fall against those that it will rise are the second lowest on record.

Consumer and business confidence have surged since Macron's election, and a closely watched monthly survey of purchasing managers on Wednesday showed that business activity began 2018 more strongly than expected.

The improved confidence is gradually translating into economic gains. Private sector hiring hit a record high in the fourth quarter of 2017 after Macron pushed through an unpopular overhaul of the labour code, his first major reform.

Tough negotiations lie ahead over plans to revamp unemployment insurance and job training, while trying to bring down public spending, which is among the highest in the world.

Robecco strategist Peter van der Welle said the positive outlook for France stemmed from its past weakness, which meant the country had more room for catch-up than Germany.

"What you typically see if a country has lagged in unemployment improvements is that sooner or later you see a stronger reflection in labour and market growth and employment growth. I think that is currently happening in France," he said.

For a graphic on cash flow into France-themed ETFs: http://reut.rs/2DyQ1dI

For a graphic on how strategists see catch-up potential: http://reut.rs/2E6oFwq

For a graphic on investors leaving exposure unhedged: http://reut.rs/2DzMFXZ

(Reporting by Leigh Thomas; Editing by Luke Baker, William Maclean)