France downgrade expected but troubling for fund managers

Managers agree the French downgrade was foreseeable but markets have been choppy since reopening. Many predict the downgrade will impact fixed income and equity valuations and the lending capacity of the EFSF.

The CAC 40 has been wavering between highs of €3,196.90 (up 0.013%) and lows of €3,189.91 (down 0.206%) since markets reopened following the loss of France’s AAA status. Eight other countries, including Austria, Italy and Spain were also downgraded by S&P.

The CAC 40 has been volatile despite French investors largely anticipating the downgrade ever since S&P announced it was reassessing the rating of several eurozone countries in December 2011.

At the time Franck Nicolas, head of asset allocation at Natixis Asset Management, said his group was “avoiding the peripheral countries such as Spain and Italy and concentrating on the core countries of the euro area”, including France.

Nicolas considered France a ‘core’ European country despite the looming downgrade as “most bad news has already been priced in to markets…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 [its AAA rating].”

But managers across the eurozone are now divided over how much of an impact the downgrade could have on market valuations.

Andrew Wells, chief investment officer of fixed income at Fidelity Worldwide Investment said “the downgrade of France was largely expected and it is certainly not as bad as a broader downgrade of triple A rated nations including Germany would have been.”

The main impact of the downgrades will be “more ‘safe haven’ flows into German government bonds,” Wells said.

Yannick Naud, portfolio manager at Glendevon King Asset Management, agreed the downgrade will affect fixed income prices, instead focusing on French government bonds.

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