Edouard Carmignac criticises Hollande, predicts French economic demise

Edouard Carmignac has used his quarterly client conference today in Paris to praise Europe’s head central banker Mario Draghi for “ending systemic risk in Europe”, but added to his standing criticism of France’s president Francois Hollande, and predicted his ruling party will be replaced by Spring next year.

The chairman and co-founder of the €50bn French asset manager said Hollande’s party would be replaced by a government “with substantially different policies”.
Carmignac has made no secret of his dislike for Hollande in the past, writing openly to him in July that the policies he announced early in his office “portend a number of ominous consequences”.

Hollande is widely viewed among the business community as populist in pursuing strategies such as taxing the rich more heavily, and standing behind unsustainable social security programs.

Today Carmignac (pictured) acknowledged there was a danger, in criticising Hollande openly, that “you are seen as defending your own interests”.

But, he then predicted France’s economy, as guided by the left-wing politician, would “plummet to such an extent and unemployment will soar, that politicians will become pressured by next Spring. I bet we will have a new government with substantially different policies and a real difference in their economic focus than previously.

“I am amazed they cannot put forward the tiniest of reforms without having the Constitutoinal Court rule against them.”

Carmignac predicted French business activity will “plummet in the next weeks and months”.

He is not the only voice at his firm portending bad news for the domestic economy.

Frederic Leroux, director of risk management, said he had been amazed France had held onto its AAA credit rating. He said as yields on Spanish and Italian debt normalise, they will present “fierce competition” for French bonds.

“France has purchasing managers indices at 20, and we see France has the lowest leading indicators worldwide, and that tells us there is a recession afoot. In France no real structural reform has been implemented and there has been an increase in unit labour costs. Structural reform is supposed to make a country become competitive again and export, but in France no efforts have been made so far.”

In contrast to France, Carmignac said, eurozone neghbours Spain and Ireland had taken necessary steps to tackle their debt problems. Ultimately, the ECB may not even have to step in to buy Spanish sovereigns, Carmignac added, though Leroux said Madrid would probably have to ask for central financial support.

At the same time as criticising France’s president, Carmignac praised the European Central Bank’s, Mario Draghi. This stands in contrast to the firm’s earlier criticism of Draghi’s predecessor Jean-Claude Trichet, for raising interest rates and not providing enough support to the euro at a critical juncture.

As Trichet prepared to vacate his post, Carmignac wrote in an open letter: “Farewell, you certainly won’t be missed! You have endangered the euro with ill-considered rate hikes and clearly inadequate support for the debt of weakened European countries.”

By contrast, Carmignac said today Draghi had ensured “there is no longer systemic risk, with all the liquidity [he offered via ECB bond buy-back programs].

“Draghi has said there will be tough times, but the message to [Spanish] business was ‘you can investor’, and for households, ‘you can benefit from lower property prices and borrow’, and he has leant some stability to the situation. I would place a bet Spanish business activity will stabilise in the next 12 months.”

Carmignac Gestion has selectively bough Spanish and Italian sovereign bonds, and some French bank stocks, on the back of Draghi’s words.

Leroux cautioned: “While we feel a financial crisis in all likelihood is a thing of the past [in Europe], the economic situation remains very complex. Many recession-avoiding measures will have to be taken and there are countries that still may encounter difficulties.”

Carmignac also had to defend his firm’s funds for a very defensive stance they took before summer, before Draghi had announced his grand plans for Eurozone banks, on 26 July.

Within a week of Draghi’s words, key Carmignac funds were boosting their equities holdings, in some cases to the legally allowable maximum, and they typically outperformed their benchmarks despite starting the summer from defensive stances.

“A lower [equity] exposure is part and parcel of an absolute-performance style. When you walk through a minefield, as we did over the past four years, it is realistic to focus on capital preservation [more] than focusing on growth at all costs.”

Carmignac said Draghi’s ‘backstop’ would allow stock pickers such as those at Carmignac Gestion to practice their security selection skills more profitably again.

Leroux said: “With the end of systemic risk we can start business as usual as fund managers again. Previously it was ‘all on’ or ‘all off’ and it was hard to find investments. Now fund managers can do their stock picking much more than they could in the past.”

Carmignac believes European stocks are priced too cheaply, and emerging markets should trade at a premium, not discount, to developed markets given growth prospects in the developing world. The euro may also strengthen in the short-term.

One outstanding macro concern, however, is America’s ‘fiscal cliff’, due to be ‘reached’ on 1 January. The president and politicians elected on 6 November will therefore have less than two months to tackle America’s debt problem, and meagre growth prospects.

While Carmignac Gestion sees euro strength coming, Rose Ouahba, head of fixed income, said she is holding onto US dollars and Treasuries, ‘just in case’, and that Treasuries retain their “usage value” even if they are of little investment value on such low yields. She sold out of Bund positions mid-year.

Leroux said: “The systemic risk in Europe has been cut, or allayed, and replaced with the fiscal cliff risk.”

While US households seemed fairly unconcerned by the looming danger, he said, companies were worried – despite Federal Reserve chairman Ben Bernanke having given a ‘do whatever it takes’ style message to corporate America.

Carmignac said he was confident Washington would deal with the potential crisis in time, but he forewarned of equity market volatility during negotiations over how they should ‘address’ the cliff.


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