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How will Macron's Labor Reforms Impact ETFs

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A few months ago, France elected its youngest ever president, Emmanuel Macron. Macron was seen as the poster boy of anti-populist politics in a world where Donald Trump and Brexit threaten the very existence of globalization and liberalization.


However, all’s not well for the French president. The approval ratings for the ex-banker have been nose diving. It has declined to about 35% in August from approximately 55% in July. The number is almost on par with Macron’s U.S. counterpart Donald Trump, after he received backlash for his recent Charlottesville comments.


Macron is seen as a business-friendly president. In his election manifesto, Macron had promised to make it easier for businesses to hire and fire by bringing about changes in the labor laws.


Although he has a clear majority in the parliament, he faces risks of widespread criticism by the unions and a halt to activity owing to that. Macron’s government plans to unveil its pro-business labor reform this week, while labor unions and the president’s political opponent Jean-Luc Melenchon plan to protest the changes by calling for strikes.


The success of his flagship reform is expected to define his capability and potential to bring about other changes that investors have been desperately waiting for such as primarily corporate tax cuts and bringing down state spending. Macron also faces the challenge of keeping France’s deficit under 3% in accord with EU rules.


Macron’s pledge to cut the tax rate from 33% to 25% is exciting for domestic businesses. Moreover, a fall in labor costs will significantly boost earnings for large-cap companies in France (read: France to Introduce Tax Cuts: ETFs to Buy).


Although too early into his presidency, if Macron succeeds in doing what his predecessors couldn’t, that of changing the labor code of France, which has been viewed as too restrictive for decades, it will revolutionize the country’s operations and its stand in the global market space. So much so, that he even stated that the EU carries the risk of breaking up if the labor reform is not passed.


Despite consumer confidence dropping marginally to 103 in August from 104 in the previous month, industrial confidence in the economy increased to 111 in August from 108 in the previous month.


Moreover, euro zone’s second-largest economy grew 0.5% in the second quarter of 2017. In July, the economy grew 1.8% year over year compared with 1.1% in the previous month.


Unemployment is at a five-year low, as it dropped slightly to 9.5% in the second quarter of 2017 from 9.6% in the previous quarter.     


Therefore, despite all the possible downsides, investors remain upbeat about the potential of Macron and of his capability to deliver on his promises.


Let us now discuss the most popular ETF focused on providing exposure to the French economy (see all European Equity ETFs here).


iShares MSCI France ETF (EWQ - Free Report)


This ETF is a pure play on French equities and provides exposure to large and mid-sized companies in France.


It has AUM of $642.15 million and charges 48 basis points in fees per year. From a sector look, Industrials, Consumer Discretionary and Financials are the top three allocations of the fund, with 19.81%, 17.68% and 15.60% exposure, respectively (as of August 25, 2017). Total SA, Sanofi SA and BNP Paribas SA are the top three holdings of the fund, with 8.06%, 7.62% and 5.76% exposure, respectively (as of August 25, 2017). It has returned 20.63% year to date and 24.55% in the last one year (as of August 28, 2017). It has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.


Let us now compare the performance of this ETF to a broad Europe based ETF, EZU.


iShares MSCI EMU ETF (EZU - Free Report)


This ETF is a play on developed European economies using the common currency with a focus on large and mid-cap equities.


It has AUM of $13.35 billion and charges 48 basis points in fees per year. The fund has a 32.14% allocation to France, 28.91% to Germany and 11.15% to Netherlands (as of August 25, 2017). From a sector look, Financials, Industrials and Consumer Discretionary are the top three allocations of the fund, with 20.94%, 15.08% and 13.31% exposure, respectively (as of August 25, 2017). Total SA, Sanofi SA and Bayer AG are the top three holdings of the fund, with 2.60%, 2.45% and 2.31% exposure, respectively (as of August 25, 2017). It has returned 21.36% year to date and 23.03% in the last one year (as of August 28, 2017). It has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook (read: ETF Winners & Losers on IMF Growth Forecast).


Below is a chart comparing the performance of the two funds.


Source: Yahoo Finance


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