April 15, 2003
Montana sells French stocks

The publicly run pension fund in Montana recently decided to sell its French equities. It was billed as an investment decision:

"We couldn't figure out why France would be so adamant in keeping a murderous dictator in office," Klawon said. "The only thing we could surmise is perhaps French companies have been doing business with Iraq against U.N. sanctions."

If there were illegal dealings by the French, Klawon said that would add to local investment risk.

"If we were helping French companies that were indirectly contributing to terrorism, what would the people of Montana think?" he said.


With a total of around $15 million in stock, the amount is puny and is not going to make the slightest difference in French stock prices. Although the rationale given is investment-based, it's obvious that the underlying motive is political. While I've been avoiding French products myself, it's a rather more dangerous thing to do for the trustees of a pension fund. They have a fiduciary duty towards their shareholders to protect their investments and to take decisions that are in their interests. Failing to do so runs the risk of serious jail time. While I sympathize with the sentiment, the Montana trustees are opening themselves up for a potential legal liability here.

However, the investment-based case is not entirely without merit, as French companies have been dealing with Saddam. It's not clear though how much of an impact these deals have made on aggregate profitability of corporate France. The most flagrant of these is probably the deal that TotalFinaElf made with Saddam to develop the Majnoon and Bin Umar oil fields (these are known as "supergiant fields," with estimated reserves of 10 billion barrels of oil, and production capacity of 1 million barrels per day). That deal was thought to be worth in the order of $50 to $75 billion dollars. I don't know how these estimates were made, but it when people are talking about the worth it's like to be in terms of revenues rather than profits. TotalFinaElf currently has about $100 billion in revenues a year, and that $50 to $75 billion is probably a lifetime number, not an annual one. Still, it would have added perhaps $5 billion a year in revenues, and that would translate into $500 million to $1 billion in extra profit, depending on how much of a sweetheart deal TotalFinaElf got from their friend Saddam. But even that does not necessarily move stock prices.

It all depends on what kinds of expectations have been priced in. It's all a relative game and any newsflow affects stock prices to the extent that the newsflow differs from the expected, priced-in newsflow. That's how companies can report a huge profit but still see their stock price decline, if that profit did not match expectations. It does not look as though TotalFinaElf's megadeal with Saddam was priced in to begin with, so there are unlikely to be any losses stemming from the unwinding of the deal. On the other hand, there is a huge loss compared to what might have been.

The way French stock prices might be affected is by the marginalization of French companies by American consumers, be they private, corporate or government consumers. If the anti-French feeling persists for long enough, then French companies will be feeling the pinch eventually. But it's unlikely to be a short-term effect. Although there is plenty of anectodal evidence for Americans boycotting French products, the effects have thus far not been quantifiable. It'll be interesting to see how that shakes out. The much bigger worry for French companies is the poor state of the French economy, which really could put a big dent in their earnings.

Posted by qsi at April 15, 2003 11:25 PM | TrackBack (0)
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As reported today, the informal boycott of French products is being noticed by some of the smaller French companies.

http://www.washingtonpost.com/wp-dyn/articles/A33986-2003Apr15.html

Posted by: Sebastian Holsclaw on April 16, 2003 09:21 PM
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