On the evening of Friday, Nov. 13, the day took on a gravely tragic turn as Islamic radicals viciously murdered 129 people in Paris, France — the worst act of terrorism in the nation’s history.
The rogue terror network known as ISIS later claimed responsibility for the Paris attack, to which French president Francois Hollande unflinchingly termed an “act of war” and vowed a “ruthless” response.
As expected, the national priority of France and her allies have shifted towards security concerns and to bringing ancillary partners of the cowardly Paris attack to justice. But amid the terrible human crisis in the City of Light, there are growing questions on how the domestic economy — in particular, publicly-traded French stocks — will perform.
For his part, Hollande promised during a joint session of parliament that terrorism will never undermine the core of French society.
In truth, the financial impacts of terrorism have not been widely studied. However, historical performance in the markets suggest that the overall consequences are negligible. The closest example to the Paris attack is the London Underground bombing of July 7, 2005, which killed 52 people. Just a day after the terror incident, the benchmark FTSE 100 index gained 1.4%.
Similar stories of resilience in the markets can be found here at home. Just two business days after the bombing of the World Trade Center in New York City on February 26, 1993, the S&P 500 index moved up 1%. The response to the Oklahoma City bombing that occurred on April 19, 1994 was also swiftly bullish, with the S&P 500 gaining over 1% by the end of the week.
While French stocks don’t seem immediately at risk, investors should maintain a degree of caution. The incredibly complex dynamics surrounding the Paris attack makes forecasting the trajectory of French stocks supremely challenging. In particular, the following three investments may face some near-term uncertainty.
French Stocks: iShares MSCI France Index (EWQ)
As the sole exchange-traded fund covering the broad performance of French stocks, lots of eyes will be focused towards the iShares MSCI France Index (EWQ). Initial signs are promising, with the EWQ moving up nearly 1% immediately following the Paris attack. Year-to-date, the EWQ is up 2.4% in what has been an exceptionally choppy time period.
Let’s not forget that, earlier this year, France suffered an act of terrorism similar to the recent Paris attack. On January 7, gunmen with ties to radical Islamic groups stormed the office of the satirical newspaper Charlie Hebdo, eventually leading to three days of terror and the senseless murder of 12 innocent people.
However, French markets refused to falter in the face of such terrorism. Just a day after the initial assault, the EWQ jumped nearly 2%. A month later, the ETF of French stocks gained more than 7%.
Could a similar boost be expected by December of this year? Global markets generally took a dim view immediately after the Paris attack, but countered just as quickly after U.S. equity indices rallied on Nov. 16. However, moving forward, the EWQ must contend with an unusually bearish environment, with recent economic data from Japan, Europe and China falling below expectations.
Ultimately, weakness in France’s key international partners may be the biggest threat towards French stocks. However, the psychological turmoil left in the wake of the Paris attack could still engender volatility in the short run.
French Stocks: LVMH Moet Hennessy Louis Vuitton (LVMUY)
Although luxury products company LVMH Moet Hennessy Louis Vuitton (LVMUY) has an extremely enviable portfolio saturated with globally iconic brands, it may not be enough to overcome near-term fallout from the Paris attack.
Despite the fact that LVMUY stock has returned a resounding 13% YTD, it shed about 5% since the first of this month. Additionally, LVMUY was down -0.6% immediately following the Paris attack, in contrast to the broad bullishness in French stocks over the same time period.
There’s little question that the French economy will be able to fully recover from their recent tragedy. At the same time, key industries such as tourism have already taken a beating, with shares of publicly-traded booking agencies and European airliners encountering sharp volatility. In turn, this development will more than likely reduce foot traffic in high-interest areas, thus cutting into the revenue potential for LVMUY.
The timing of the terrorist event was also deeply unfortunate — right in the middle of the festive winter season. From an investor’s perspective, LVMUY stock has already seen its fair share of wild swings in both price and volume. A disruption like terrorism is a wholly unnecessary roadblock to traverse.
As with the benchmark EWQ, a combination of factors will pressure LVMUY in the days ahead. However, the company’s closer ties to consumer sentiment makes its stock a bit more riskier.
French Stocks: AXA Group (AXAHY)
Headquartered in the heart of Paris, AXA Group (AXAHY) — one of the most storied companies, founded back in 1852 — was viscerally impacted by the recent terrorist attack. Acknowledging the string of violence rocking France, AXA chairman Henri de Castries stated succinctly, “We are struggling to find words to express our sorrow, our dread, our anger.”
Such pointed words and conflicting emotions are an apt description for the psychological chaos that is undoubtedly reverberating through the hearts and minds of the French populace. The fact that terror group ISIS continues to threaten more acts of murderous barbarism does nothing to alleviate matters — a bearish omen for AXAHY, which largely depends upon face-to-face networking as a core part of its business.
While the terrorism aspect will eventually fade, AXAHY faces a broadly fundamental challenge in the years ahead. A pervasively low interest rate environment in Europe will weigh heavily on companies that sell life insurance products, according to a recent report from ratings agency Moody’s. Compounding matters is that regional economic weakness may eventually force the European Central Bank to further increase the scope of its monetary stimulus program.
Like other French stocks, AXAHY finds itself in a precarious position due to the volatile mixture of security threats and bearish macroeconomic factors.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.