market insight france q2 2014

Moreover, they will also step up their allocation towards emerging market debt in the year to come. High yield is also strongly back in fashion. The only asset classes French fund selectors are planning to retreat from are developed government and corporate bonds.alt=''
In defiance of the dominant pessimist mood about the state of the French economy, which has resulted in record low approval rates of President François Hollande, also have an overwhelmingly positive macroeconomic outlook (see chart 1). Though the macroeconomic sentiment has consistently improved since Expert Investor Europe started gathering data roughly three years ago, it is now net positive for the first time. Though the fund selectors our researcher spoke to are still not particularly positive on France’s economic prospects, they believe the European debt crisis has been subdued. At the same time, they feel the recovery of the European economy as a whole is well underway, further supporting equities.

European equities

Belief in further upside
European stocks are the most popular equity category among Parisian fund selectors, mirroring general sentiment among their European peers. Two thirds of fund buyers interviewed by our researcher said they will step up their allocation, extending a two-year long bull streak for the asset class. The


remaining third will leave their allocation unchanged. A number of interviewees said they find the deleveraging process many European companies have engaged in encouraging. Just like a year ago, French investors have a preference for small- and midcaps within European equities. US equities, delegates’ favourite at last years’ Expert Investor France, are slightly out of favour, also following a general European pattern. Also French fund selectors are starting to become wary about the high valuations there.

Emerging market debt

Massive turnaround


Perhaps the most striking trend among French fund selectors is their planned return to the emerging markets. While the region was very popular with Paris-based investors at the time of the previous Expert Investor France in June 2013, appetite dropped soon thereafter into negative territory as the emerging markets bonds and equity sell-off began. But the tide has turned, and the French are leading the way.
Emerging market corporate bonds sentiment is 

even witnessing a massive turnaround. A record 71% of interviewed fund selectors will increase their allocation to the asset class, up from only 9% in January. Paris-based fund buyers underpin their renewed love for emerging credit referring to the attractive starting yields after the large outflows the asset class witnessed over the previous months. Some fund selectors expect a good performance of emerging market stocks will benefit credit, while they stressed companies in the emerging markets seem to be in better financial health now as they have been deleveraging following the start of QE tapering last autumn. Appetite for emerging market government bonds has also surged. Half of interviewees plan to increase allocation to the asset class, though most of them said they are keeping their allocation stable for now, and are waiting for the right moment to step in.

Emerging market equities

Increased appetite
Also demand for emerging market stocks has risen, and is now back on last year’s level. Half of France’s fund selectors will increase their allocation to the asset class, though this happens from a low level. Most fund selectors that were interviewed are underweight emerging markets now, and consider stepping up again after the huge underperformance of the past 18 months. A further 25% keep their exposure unchanged. Asian equities are even more

alt=''popular, with almost six in ten fund selectors increasing exposure during the next twelve months. Still, one fund selector told our fund researcher that, within emerging market equities, he sees the best opportunities in developing


High yield

L’exception française
The interest in emerging market debt among French fund selectors is largely motivated by a lack of return perspectives in traditional fixed income investments. Half of interviewees will decrease allocation to developed government and corporate bonds, while bulls are scarce. High yield and absolute return were also mentioned as interesting alternatives. Three quarters of interviewed fund selectors will extend their use of alternative bond strategies.
Similar to last year, convertible bonds are in fashion as a way to generate equity exposure in their bond portfolios. High yield bonds are also benefiting from the move away from high quality bonds. While the asset class is still highly unpopular in most of Europe, French fund selectors are outright high yield bulls. Half of the fund selectors our researcher spoke to will increase their exposure to the asset class, while another 25% will keep their allocation stable.   





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