(Bloomberg) — Investors are steering clear of French assets after a sudden flare-up in political tension this week, betting that the volatile period is far from over.
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S&P Global Ratings is scheduled to update its assessment of France on Friday, adding to lingering uncertainty over the budget and the fate of the current government. The exodus from the euro zone’s second-biggest economy has already driven up borrowing costs versus peers and sent stocks plunging, with the benchmark equity index on track for its worst year relative to European shares since 2010.
“We could see events which would trigger much more important discounts,” said Nicolas Simar, senior equity fund manager at Goldman Sachs Asset Management. “It’s very, very difficult to say that we have reached a bottom.”
The standoff, which threatens Prime Minister Michel Barnier’s ability to pass a budget for next year, comes as investors were already souring on Europe due to the twin threats of US trade tariffs and escalating Russia tensions. Now France is looking like the worst of a bad bunch, meaning that any money that is allocated to Europe will likely go elsewhere.
S&P downgraded France’s credit rating to AA- from AA in May, highlighting the government’s missed goals in plans to restrain the deficit. Barnier’s budget for next year includes crucial spending cuts, but the far-right National Rally party’s Marine Le Pen has vowed to bring down his administration with a no-confidence motion if its demands are not met.
Both Fitch Ratings and Moody’s Ratings gave France a negative outlook last month, citing the deterioration of public finances and the political challenges in containing swollen budget deficits.
International investors hold more than half of France’s government debt, according to Banque de France data, and there are already signs that Japanese investors are selling and switching into other European bond markets. French bonds suffered their worst weekly outflow in more than two years in the five days through Tuesday, according to data compiled by BNY, the world’s largest custodian.
That’s helped send the gap between French and German yields surging to levels last seen during the euro area sovereign debt crisis in 2012. The spread has jumped nearly 15 basis points in less than two weeks.
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“It’s come out of left field — people thought a budget would happen and had their eye on the US,” said Hank Calenti, a senior fixed income strategist at SMBC Nikko Capital Markets. “So it’s sell first, ask questions later at the moment.”
Matthieu de Clermont, head of insurance and regulatory strategies at Allianz Global Investors, said that a rating agency downgrade is already largely priced in to French assets so S&P’s update may not trigger more selling.
“Broadly the market was under-allocated or was playing the French risk so one can expect that if this volatility materializes, some investors would come back and will reinvest in the positions they sold,” de Clermont said.
He also noted that investors would probably start buying again if the spread over German bonds widens to 100 basis points, from 85 now. That view is shared by Vincent Mortier, chief investment officer at Amundi SA, Europe’s biggest asset manager.
Equity investors like Goldman’s Simar say the selloff is already creating some select opportunities for stock pickers in sectors like tech and IT services, but but corporates tied to French borrowing costs, like utilities or telecoms, are at risk of further turmoil.
Souring sentiment also means that France is increasingly being compared to countries that were once at the center of the European debt crisis, like Greece and Spain. The gap between French and Italian yields has collapsed, nearly halving since September to about 40 basis points.
“The 2025 trade could be the convergence toward Italy,” said Axel Botte, head of markets strategy at Ostrum Asset Management. “The focus is on core now, rather than peripheral bonds as Spain, Portugal, even Italy have shown much better fiscal trends.”
–With assistance from Michael Msika and Samy Adghirni.
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Publish date : 2024-11-27 18:18:00
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