What does the French CAC 40 index reflect?
First of all, let's take a moment to recall what the French CAC 40 index is all about. It is a basket of 40 French companies. The composition of this index is determined by the choice of 40 companies from among the 100 companies with the highest trading volume. It is also important to understand that each company in the index has a predefined weighting in relation to its total market capitalisation on the NYSE Euronext market. It is also important to note that the maximum weight of a single stock's capitalisation in this market index is 15%.
Of course, the stocks included in this index are selected to best represent the French economy and therefore come from all sectors of activity. This representativeness is important and therefore requires continuous updating of this composition, which explains why, from one year to the next, the companies included in this index will change.
More precisely, it is the NYSE Euronext Scientific Council that is responsible for determining which stocks can enter or leave the composition of this index. This council is made up of experts who are independent of the stock exchange operator to ensure objectivity. A meeting is held every three months on a permanent basis, but also on an ad hoc basis when an important financial event occurs, such as after a merger between two companies. As we will see in more detail below, the elements used to select the stocks included in this index are both the volume of transactions in the company's share and its representativeness in its sector of activity.
To better interpret the composition of the CAC 40 stock market index, you need to take into account the total market capitalisation of the companies in the index. Here is the complete list of companies in the index from the largest to the smallest capitalisation as of 29 April 2022:
Of course, the list we have just presented is likely to change over time and corresponds to the composition of this index in April 2022.
As explained above, the 40 companies that are chosen to be included in the CAC 40 are selected from among the 100 French companies with the highest trading volumes.
However, in order to be included in this index, listed companies must of course meet certain financial conditions, such as stock liquidity, market capitalisation and significant daily trading in shares. It should also be noted that the free float, i.e. the proportion of the company's shares that can be traded on the market, is also a criterion taken into account in this decision. Indeed, the weight of a company in the index will be proportional to its free float.
Of course, once all these criteria have been established, it is the board of experts that is responsible for modifying or not the composition of the index every three months. When a company leaves the CAC 40, it is logically replaced by another, which is most often chosen from the CAC Next 20 index.
Historically, certain stocks have been included in this index since its creation in 1987. These include Air Liquide, Carrefour, Danone, L'Oréal, LVMH, Michelin, Saint-Gobain, Sanofi, Société Générale and Vivendi.
Can we rely on the CAC 40 to analyse the health of the French economy?
In reality, the CAC 40 is not a true reflection of the French economy because some sectors are over-represented. This is particularly true of the finance sector, which alone accounts for nearly 16% of the index, and the luxury goods sector, which accounts for 11.4% of the CAC 40 index.
It is also worth noting that the vast majority of the 40 companies that make up this index are also multinationals that generate a large part of their turnover outside the French market. For example, Sanofi and Total generate only a quarter of their turnover in Western Europe and only 10% at most in France. This is also the case for LVMH and L'Oréal, which are also two heavyweights in this index and which only generate less than 12% of their turnover in France. However, these companies have a very high weighting in the calculation of the CAC 40 stock market index, which does not really reflect the French economy as such.
However, it is interesting to know these stocks because it is possible to trade them individually online on a CFD trading platform.