(News Bulletin 247) – The Parisian index benefits from an alignment of planets, with the reopening of the Chinese economy, excellent corporate results and favorable expectations on monetary policy.

In the space of a little over a year, the mood has completely changed in the market. This Friday, the CAC 40 set a new session record, at 7,509.34 points shortly before 12 p.m. It has now been several times this year that the main barometer of the Paris Stock Exchange has pushed back its peaks.

Just a year ago, the index continued to drop sharply, while the outbreak of the conflict in Ukraine logically gripped the markets. The war has not stopped since, and the economic environment, although better than initially feared by economists in Europe, remains unattractive.

How to explain then that the market constantly pushes back its peaks? Here are some answers

• China is reopening its economy

At the end of 2022 and at the very beginning of 2023, China, the world’s second largest economy, withdrew its last health restrictions, de facto ending an ultra-penalizing zero-Covid policy for its activity. This obviously boosted the CAC 40 groups, especially luxury, with China hot on the heels of the United States as the sector’s leading global market. However, the three most important groups of the CAC 40 in terms of capitalization (that is to say the total stock market value of their shares) are luxury groups or affiliated to this sector: LVMH, L’Oréal and Hermès.

“The reopening of China was the big catalyst for the sector because the CAC 40 is made up of international companies that are therefore focused on global growth issues, or even discounted sectors, with low valuations, such as the automotive industry, and which are therefore sensitive to these growth themes”, underlines Alexandre Baradez of IG France. The market analyst, however, believes that this buoyant wind has now been “fully played” by the market and that it is therefore now necessary to monitor the pace of reopening of China.

• Business results have been good

The CAC 40 comes out of a series of publications of annual results, that is to say for the 2022 financial year, which “proved to be very satisfactory despite a cocktail of difficult elements last year”, notes Alexandre Baradez. A plethora of groups have announced record profits, including LVMH, TotalEnergies, BNP Paribas, Stellantis and Saint-Gobain, which had posted historic highs on absolutely all of its indicators.

Admittedly, records can be anticipated by the markets and can even sometimes disappoint investors, when the latter were anticipating even stronger results. But that has generally not been the case. According to a count made by News Bulletin 247, the vast majority of CAC 40 companies (26 out of 38 having published annual results) saw their stock market prices rise during the session following the publication of their annual accounts.

In addition, the first results for the first quarter of 2023, like LVMH or Hermès, are excellent for the moment.

• Cascading share buybacks

“It is also worth highlighting share buybacks, which are a somewhat new theme in Europe compared to American groups and which occurred at a time when European stocks were becoming attractive”, underlines Alexandre Baradez.

Share buyback programs consist of a company acquiring its own shares on the market and then – in the vast majority of cases – canceling them. Mechanically and all other things being equal, earnings per share increase for shareholders since the number of shares decreases. In pure financial theory, these share buybacks do not create value, because the company is simply redistributing cash it already has. But in practice these announcements are often well received by investors because they are perceived as a signal of confidence on the part of company management. This means that it believes that it has the backbone strong enough to finance its development while restoring liquidity to its shareholders.

According to a breakdown by News Bulletin 247, nearly 13 billion euros in share buyback programs were announced by tenants of the CAC 40 in the wake of their annual results or shortly after.

The French executive, Emmanuel Macron in the lead, recently castigated these share buyback programs, wanting to force companies with these practices to redistribute more to their employees via employee savings or exceptional bonuses.

• Key rate expectations ease

Financial markets also tend to evolve according to the monetary policy of the major central banks, that is to say, at present, their cycles of tightening key rates. Higher interest rates mean a higher cost of credit and therefore, by extension, financial conditions that are less favorable to growth, or even capable of slowing it down.

But in recent months investors have begun to anticipate less tightening from the major central banks, led by the US Federal Reserve. “This has benefited growth stocks, especially technological ones”, emphasizes Alexandre Baradez.

The outbreak of the mini-banking crisis (see below) also tightened credit conditions on the part of banks, especially in the United States. This is one more reason for central banks to consider slowing down rate hikes. According to data from the CME Group, investors are currently expecting a 25 basis point (0.25%) hike from the Fed at its next meeting in May. But according to their expectations, this hike would be the last, and could even follow one or more Fed rate cuts during the year.

For the European Central Bank, the equation is a bit more complicated, as the European institution is lagging other central banks on its rate hike cycle. That is to say that one or more increases are probably still necessary to reach the level that should allow inflation to return to a rate deemed acceptable by the ECB, i.e. close to 2%. , medium term. Nonetheless, at its March meeting, the central bank dropped its “forward guidance,” or codified terms, that previously told the market that it still planned to raise policy rates.

• The banking crisis did not last

Like all the other financial markets, the CAC 40 suffered a violent setback during the month of March, when the mini-banking crisis broke out. The bankruptcy of the Californian bank Silicon Valley Bank (SVB) triggered a movement of fear raising fears of a contagion of these difficulties to the whole system. Credit Suisse, structurally battered by a failing culture of risk management, quickly found itself in the eye of the storm. But the rapid intervention of the American authorities to curb the crisis, even if it means going back on the limit of bank deposit guarantees, and that of the Swiss, who married Credit Suisse under duress to UBS, made it possible to calm the market.

“A month after the banking stress triggered by the bankruptcy of the two American banks and the problems of Credit Suisse, calm seems to have returned to the markets and the main stock market indices are still trading at the highest levels of the year” observes OFI Asset Management.

However, vigilance is still required. The CEO of JP Morgan, Jamie Dimon, the last of the big bankers to have experienced the 2008 crisis, warned that this banking crisis was not over and that it would leave scars for several years.

• The war in Ukraine has taken a back seat

“In the stock markets, the conflict no longer plays a role, despite the immeasurable suffering of soldiers and civilians on both sides. Indeed, the problem of a possible collapse in the supply of raw materials in Europe has been largely resolved,” asset manager DWS commented last month.

Nevertheless, here again, investors would be wrong to be too complacent. “We will also have to monitor Ukraine, which remains a potential positive and negative risk factor depending on the evolution of the conflict”, Nicolas Descoqs, manager at Clartan associés, recently underlined in an article that we devoted to the ability of the CAC 40 to seek 8,000 points by the end of the year.