The opening ceremony of the XXXIII Summer Olympics Paris 2024 kicked off on 26 July. Unfortunately, the scandal at the ceremony, involving a parody of the Christian ‘Last Supper’, has caused controversy instead of general delight. Relatively high ticket prices affect the fact that around 1.5 million tourists will come to France, even though the organisers had hoped for 3 million. How might the Games, which cost an estimated €9.7 billion to organise, affect the economy and business in France?
Table of contents:
- How important will the Olympic Games be for France's economy?
- Impact of the Olympic Games on the CAC40 index
- What does the future hold for the CAC40 index?
How important will the Olympic Games be for France's economy?
It is estimated that the Games will bring $12 billion to the French economy, while generating $5.7 billion in taxes. This would mean that they would raise France's GDP by around 0.8 per cent per year. Despite criticism of underperformance in the aviation sector and overestimated visitor numbers in the tourism industry, the economy as a whole is doing relatively well, recording GDP growth of 1.1 per cent in the second quarter.
Source: Tradingeconomics
Impact of the Olympic Games on the CAC40 index
Despite the intense promotion of France, the local stock market has seen a 1.2 per cent decline over the past month and is 9.6 per cent below its peaks, as a result of the turmoil surrounding the National Assembly elections.
Source: Conotoxia MT5, F40, Daily
To better understand the impact of the Games on business, it is worth looking at the sectors covered by the stock index. It will be seen that the consumer goods sector, which includes luxury brands such as LVMH and Hermes, has a significant impact of 19.3 per cent.
Source: Conotoxia own analysis
Another index company that is already seeing the impact of the Olympic Games on its performance is hotel group Accor SA. Hotel operators in Paris have decided to cut prices and lift minimum stay requirements to attract travellers. Initial room rates, which averaged €342 per night, have now fallen to €258 per night. This is a significant drop compared to previous months, when prices were 70 per cent higher than in July 2023.
Low attendance and concerns about high prices and security have resulted in lower than expected demand for accommodation during the Games. In response, hoteliers are offering discounts of up to 70 per cent and lifting restrictions on arrival dates and length of stay. Accor has revised its forecasts, anticipating lower profits than previously expected. Although some luxury hotels are still maintaining high prices, the general trend is towards falling costs and flexibility in offers to attract recent travellers. Investors have reacted very negatively to the news: after earlier difficult months, the company's shares have fallen a further 4 per cent since the Olympics began. They are now already 30.8 per cent below their 2015 peaks.
Source: Tradingview
What does the future hold for the CAC40 index?
Let us recall the basic rule of investing according to New York University Professor Aswath Damodaran: ‘Keep your eyes on the price’, as even the best company that you overpay for may turn out to be a bad investment. Therefore, let's check how much the CAC40 might be worth based on earnings forecasts. Over the past 10 years, this index has generated an average annual return of 7 per cent.
Let's use the average annual return on the S&P 500 index, which has been 8.9 per cent over the past 10 years, as a discount rate.
In terms of earnings, let us assume that French companies continue to reinvest an average of 25 per cent of their profits, and with an average return on equity (ROE) of 13 per cent. As a result, the expected rate of earnings growth in the coming years would be 3.3 per cent. We can then conclude that the current value of the index is 31 per cent above its intrinsic value.
This means that French companies may have a difficult time generating a better return for investors than their US counterparts.
Source: Conotoxia own analysis
Grzegorz Dróżdż, CAI MPW, Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
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