“A Macron or Fillon victory will be seen as a continuation of the status quo, while the possibility of some reforms would be positive for French debt, at least against other European debt markets,” says Kames’s Lynch.
Only France matters
But even if Le Pen prevails, investors in Italian debt will probably suffer at least as much, as a victory by the far-right anti-EU politician would prompt fears of a total breakdown of the EU and the euro.
“Ultimately, when the market has to price an increase in such an outcome it should be much worse for Italy than France because of its current weakness. Italy’s debt dynamics are in a worse state by far than France’s, and in the event of an EU breakdown the market would seek out the weakest links in the system and focus their attentions on them,” said Lynch.
Italian debt is obviously a riskier venture than French debt, and investors should probably not take a strategic overweight to it. But still, if Italian debt is going to suffer disproportionally from a Len Pen win, the reverse should occur if one of her reform-minded rivals wins.
Therefore, one may contend the performance of Italian debt will actually depend on what happens in France. This makes distinguishing between the two look like a pretty trivial exercise.
The best course of action may therefore be to stay close to the benchmark and try to make money taking tactical positions, as Sartain plans to do. “Political risk and sovereign risk won’t be a straight line this year, so we will want to be tactical,” he said.
It’s another question, however, whether investors should consider an active manager at all in an asset class where yields are so low across the board.
The Vanguard European Government Bond Index fund, with an annual management charge of only 0.25%, may be a better option. Despite the volatility characterising the European government bond market over the past two years, few active funds have managed to outperform the index over that period.
“We have only had passive exposure in the government bond space for a long time,” says Rico Bosma, an fund analyst at Wealth Management Partners in the Netherlands. “We will only start looking at active funds once yields move significantly higher.”
