Why Should You Care About The CAC 40?

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The CAC 40 is the benchmark stock market index of France, and one of the two major indices often described as the “core” of the Eurozone economy. The name comes from Cotation Assistée en Continu (Continuous Assisted Quotation) with 40 companies listed and is tabulated by Euronext, the successor of the Paris Bourse from 2000 onwards.

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Characteristics of the index

The CAC selects from and includes a broader range of companies than it’s German counterpart, meaning it is more representative of the French economy as a whole – however, it still has a relatively small selection of companies in comparison to other indices, and as such is a better gauge for the performance of established, major corporations.

France is the second largest economy in the Eurozone, and is highly dependent on trade within the group, which is mirrored by the constituents of the CAC; over two-thirds of their business activities are outside of France. Consequently, the CAC is a poor indicator of the performance of the French economy but is still sensitive to the overall economic situation in the broader Eurozone.

As a consequence of being the index with the most multinational corporations in Europe, it is also the index with the highest participation of foreign investors, accounting for around 45% of ownership. This means the CAC is uniquely sensitive to fluctuations in the Euro.

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What’s on the index

The index is calculated as a weighted measure of the 40 most significant values of the 100 market caps on the Euronext Paris listing. The weighting system is based on free float market cap. Thus it privileges more actively traded stocks, making it more relevant for portfolio management and derivatives products.

With an emphasis on tradeability, components change more frequently than other indices; the elements are reviewed each quarter, and ranked according to market cap and share turnover in the last 12 months. Should a company have more than one class of shares on the exchange, only the more actively traded asset class will be considered for the index.

An example of the unique criteria for inclusion in the index includes Airbus, which is a pan-European consortium, that although based in France, the majority of its owners and operations are outside of France.

Why it’s important

The CAC 40 is a list of bluechip companies but is more sensitive to the broader economy than the DAX. While its components don’t give much insight into the economic situation in France, it can provide some indication to the financial health of the Eurozone when read in conjunction with other indices, such as the DAX above, as well as the FTSE MIB and IBEX.

Because of the significant component of foreign investment, the CAC is also more sensitive to currency fluctuations; with weakness in the Euro seen as supportive of the index, while a stronger Euro would impact multinational and export-oriented companies that make up the majority of the index. Broadly speaking, currency fluctuations might be seen to affect CAC performance, but not the other way around – a outperforming CAC is a symptom of higher expectations of the economy, which can also drive the currency; but it is not the index performance that is the driver (unlike, for example, the NYSE).

France is also identified as part of the Eurozone “core,” and can benefit from safe-haven flows, but because of the broad exposure of the CAC components, it is not as sensitive as other indices.

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