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market insight france 2013 q2

Our researcher interviewed a range of mostly institutional Parisian fund selectors in May, and found strong appetite for western high yield and emerging market corporate bonds. Demand for equities is also likely to continue this year, although investors are switching focus to developed stock markets and the US in particular.

Emerging market bonds

Appetite shifts from sovereigns to credit 

As with investors in other European markets, many French fund selectors plan to increase the credit portions of their developing world debt allocations.

About two-thirds of interviewees expect to bolster their emerging market corporate bond weightings during the next 12 months (see chart 1), despite concerns the sector has become expensive. Investors favour actively managed, unconstrained credit strategies which offer exposure to local currency securities.

Appetite for EM government debt is weaker in comparison (see chart 2). The sector performed well in 2012, but interviewees say returns are likely to be lower this year, given the tightening of EM sovereign spreads over US treasuries.

Western fixed income

High yield is popular despite concerns

Demand for European government bonds is almost non-existent, meanwhile, and it is a similar story for investment grade corporate debt – given the low yields in both sectors (see charts 3 and 4).

Fund selectors instead favour European and US high yield, and about three-quarters plan to bolster their exposure here – up from just one-third of respondents to our online survey in Q3 last year (see chart 5). However, investors are wary that spreads in the sector no longer offer sufficient compensation for default risk.

One interviewee complained that high yield fund managers had taken on additional duration risk to boost returns, but had failed to communicate this shift to their clients.

US equities

Investors favour healthcare and technology

While French-domiciled bond funds achieved net inflows of €3bn during 2012, according to data from the French asset management association, equity strategies suffered outflows of €25bn.

This year started brightly, however, with net equity fund inflows of some €2bn in January and February combined (see chart 6). Our research indicates stocks will remain popular in the months ahead.

French fund selectors are particularly enthused by the US market – a sharp reversal of their position last September, when many investors were preoccupied with the looming US “fiscal cliff” (see chart 7).

Interviewees are broadly upbeat on the outlook for US companies, but say it is important to invest selectively. The healthcare and technology sectors are considered especially attractive.

European stocks

Small- and mid-caps are appealing

About two-thirds of fund selectors expect to boost their European equity allocations (see chart 8) and some plan to explore opportunities in the small- and mid-cap markets. Other investors are neutral or downbeat on the region, and warn that last year’s gains are unlikely to be repeated.

Emerging market equities

Concerns grow over China

Interviewees are upbeat on developing world stocks but their enthusiasm has waned somewhat since September (see chart 9), and some say volatility constraints on their investment processes are forcing them to reduce their allocations.

Fund selectors also have worries in relation to China – ranging from the country’s slowing growth rate, to a lack of transparency in its economic and corporate data.

Despite these concerns, investors remain more interested in Asia Pacific than any other emerging market region. Interviewees say South America lacks diversification, for example, given that Brazil and Mexico account for a substantial proportion of the continent’s stock market capitalisation. Nevertheless, fund selectors are keen to learn more about opportunities in South America.

Most of our interviewees use global funds for their emerging market exposure, but some invest in BRIC strategies as a core holding and then allocate separately to individual regions and countries.

Alternatives

Convertible bonds are in vogue

Outside of traditional assets, fund selectors say convertible bonds are a key area of interest. All our interviewees use this asset class, owing to its ability to serve as a bridge between fixed interest and equities.

Investors are also upbeat on absolute return – a sector with AUM of more than €200bn in Europe following strong growth in Q1 2013, according to Lipper.

In contrast, there is little appetite for commodities, although some interviewees have gold exposure. Similarly, few fund selectors use volatility strategies and view such approaches as high-risk. However, they seek uncorrelated asset classes and are therefore keen to learn more.

Ilyes Bdioui and Will Jackson, members 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, contact Ilyes at ilyes.bdioui@lastwordmedia.com or on +44 (0)20 7382 4470. Click here to see upcoming Expert Investor Europe events in France.

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