Emerging markets tempting amid uncertain French growth

Many French investors are attempting to wash their hands of EU equities, but are not ready to commit to the only visible escape route: emerging markets. Others cling to the belief core European economies remain a safe bet for fixed income. Uncertainty seems to be the key common denominator for French fund managers heading into 2012.

The French AAA rating: does it matter?

France reported zero GDP growth in the second quarter of 2011, heightening rating agencies’ concerns over the government’s ability to meet its financial targets. This was below expectations of a 0.3% rise and down from a 0.9% increase in the first quarter of the year.

Despite a surprise rebound in the French economy in the third quarter with output expanding by 0.4%, Moody’s issued a warning to France about the viability of its AAA rating in November as the difference between French and German government bond yields breached 200 basis points, a euro-era record.

Since November any mention of France has revolved around its credit rating and newspaper cartoonists have gleefully taken to depicting the country’s beleaguered President Nicolas Sarkozy desperately trying to uphold AAA status.

Verbose sparring between France and the UK over who most deserves the coveted AAA rating has proven to be a useful distraction from broader issues in both economies.

As speculation mounts over France’s economic stability, the ratings agencies continue to pile pressure on its Sénat amd the country’s politicians are left in a precarious position. The temptation to angle for votes is strong in the run up to the French general election in May 2012, but politicians making promises they cannot afford could risk the wrath of the rating agencies, as demonstrated by Italy’s rating downgrade prior to Berlusconi’s resignation in mid-November.

But France’s fund managers are not overly concerned about its credit rating and the impact a downgrade could have on French government bond holdings. “We are avoiding the peripheral countries such as Spain and Italy and concentrating on the core countries of the euro area,” explained Franck Nicolas, head of asset allocation at Natixis Asset Management.

It is perhaps surprising Nicolas still considers France a ‘core’ European country as the country’s media has obsessively discussed the looming downgrade, accusing President Nicolas Sarkozy and his finance minister François Baroin of trying to downplay its importance to minimise the embarrassment of such a catastrophe.

But according to Nicolas, “most bad news has already been priced in to markets and a downgrade will not trigger a dramatic shock. When the US got downgraded [in August] it was more of a shock for Americans than for markets. There might be a small movement [in French government bonds] but everyone already knows France could lose it.”

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