Not only is France’s financial sector exposed to highly- indebted economies in the single-currency area, but interviewees also worry that insufficient action has been taken by politicians to improve the situation. The difference in economic performance between the weaker and stronger eurozone member states is structural and cannot be easily fixed, investors note.
For example, they question whether the Portuguese economy can become as productive as the German economy while it is in the same monetary union. Interviewees say tackling debt in the eurozone is the right policy, but they call for a compromise solution which would allow the weaker member states more room for growth.
• Net sales of long-term funds (excluding money market funds) across Europe were the best for 16 months in February, reaching € 28.7bn.
• Significant redemptions from money market funds (€ 12.4bn) meant that total inflows for the funds industry were reduced to € 16.3bn.
• SME companies’ pension fund assets remain at more than € 85bn in France, despite adverse economic conditions and falling financial markets, while socially responsible funds continue to rise.
• Subject to regulatory approval, the new company called Rothschild HDF Investment Solutions will be 67% owned by Rothschild & Cie Gestion and 33% by HDF Group. It will have pro-forma assets under management of about € 4bn.
• British investment funds could be in line for a € 20bn windfall after a European Union court ruled that taxes charged by France on dividends paid by French companies to foreign investors should not be subject to withholding tax.
• Aeroports de Paris, a French airport operator, and Inframinervous, an Italian- French joint venture, have made significant investments in Turkey despite political tensions between Turkey and France. This shows that short-term upheavals will not have long-term consequences.
What everyone is talking about
• Emerging market economy – did you say growth?
• Europe – what do French investors think?
• Equities – where to find returns? l Fixed income – what about high yield?
Eurozone worries mean French investors are downbeat on EU government bonds, with 57% negative on the asset class and none expressing a positive view (see chart 4). They are also among the least positive in Europe when it comes to the broad macroeconomic outlook – just 14% are upbeat on the prospects for growth, compared with 38% in Germany, 30% in Belgium and 16% in Spain (see chart 1).
Emerging economies remain the world’s best hope for growth, French investors say. The International Monetary Fund (IMF) forecasts that the Chinese economy will expand at an average annual rate of more than 10.1% between 2007 and 2012, while emerging Asia as a whole will grow at more than 8.5% per year.
Growth in China’s economy is expected to be driven by higher consumer spending, which in turn may benefit export businesses in the eurozone periphery. The IMF expects average annual growth of less than 1% in the advanced economies during the same period, and developing economies to account for about 50% of global GDP by the end of 2012 (in purchasing power parity terms).
Interviewees note that emerging economies have been able to expand despite weak growth in high-income countries, and huge external shocks in 2008 and 2009. The upbeat view of French investors on the developing world is reflected in their appetite for emerging market government bonds, with some 29% positive on the asset class (see chart 2).
While French investors expect stock markets to remain volatile and unpredictable, they also forecast an upturn when deflationary risks and uncertainty about the eurozone ease. As a result, interviewees say it is important to maintain a certain exposure to stock markets, to avoid being caught out by such a “surprise” rally.
They prefer large international companies (US and European) for their defensive qualities and exposure to the developing world. They are also upbeat on emerging market equities, with more than 80% actively looking to increase their weightings (see chart 3). Interviewees say that, while emerging market companies had a tough time in 2011, owing to capital outflows and inflation fears, they now trade at a discount versus Western companies and have superior balance sheets and growth.
Equity fund inflows across Europe rose to €6.3bn in February, from €4.1bn in January, according to Lipper.
High yield and gold
French investors say that high-yield debt instruments are attractively priced following sharp falls in the second half of 2011. They prefer US high-yield paper and local currency emerging market debt to European high yield. This tallies with Lipper data, which shows that pan-European net sales of bond funds reached €19.5bn in February – the highest level recorded since July 2005. High-yield strategies accounted for one-third of inflows.
After a sell-off in December 2011, interviewees say gold is an attractive alternative to cash in a negative real interest rate environment.
Ilyes Bdioui, a member of EIE’s research team, collected the information in this document through a series of interviews with senior fund selectors and asset allocators plus publicly sourced data. For more information please contact Ilyes on 0044 20 7382 4470 or firstname.lastname@example.org