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Is French instability a worry for investors?

What do asset managers make of recent political changes in Paris?


David Burrows

Prime minister Edouard Philippe stepped down on 3 July, a move that has been strongly linked to the crumbling support for president Emmanuel Macron.

So, are there deep-seated concerns about the new prime minister, Jean Castex and what an unstable French government could mean for investing?

The simple and short answer is “no”, according to Pierre Blanchet, who heads up the investment intelligence team at Amundi.

He argues that French institutions are sound and stable.

“Edouard Philippe stayed three years in office in line with the average French PMs since the onset of the Fifth Republic in 1958.

“A new government two years before general elections and after a poor result in local elections is commonplace in French politics and in line with the spirit of institutions.”

Change of policy?

He insists there are no reasons to be concerned about Castex, nor should anyone be worried about the stability of the French government.

“The reform agenda has been confirmed by president Macron and the PM will follow the guidelines. The method might change and adjusted to the new circumstances, but the objectives are the same.”

With regards to what the government has done to boost investment and mitigate the impact of covid 19, Blanchet is largely supportive of what has been done so far.

Macron has introduced various stimulus packages for start-up and home-grown tech firms.

Blanchet points out that, like most leaders in Europe, Macron has asked the government and local institutions to protect corporates during the extraordinarily challenging times we are living.

“It is the case for large and small companies as well as start-ups. Among the various measures, the €300bn French state loan guaranteed scheme known as PGE (Prets Garantis par l’Etat) is a success.

“Banks have played a key role in this and the pickup has been significant since inception. Start-ups including tech firms with low turnover can benefit from it.”

However, Blanchet suggests it is too early to say if this scheme as well as the other packages will be enough, longer term, to protect these businesses which are fragile and will be hurt by the deep economic recession.

Market pricing

The big question remains how deep the economic recession will be?

And, just as importantly, whether markets have been too quick to price in the end of lockdown and the recovery ahead?

Colin Harte, senior strategist and portfolio manager in the multi asset & quantitative solutions team at BNP Paribas Asset Management, says there continues to be a considerable degree of uncertainty associated with the risk of a second wave of coronavirus infections, and therefore the pace and magnitude of the economic recovery.

However, he is keen to point out that once policymakers acted to avoid the risks of a systemic solvency crisis, by aggressive monetary and fiscal policy stimulus that largely socialised the losses, markets rightly priced in a recovery in activity once lockdowns ended.

“Though markets would be vulnerable to a second wave if they trigger severe lockdowns, the likelihood is that policymakers will ensure that any necessary lockdowns are more localised and targeted in order to minimise the economic consequences.”

He adds: “This view implicitly underpins the market recovery.  Whilst there will be setbacks during the recovery, markets are right to look forward to a strong recovery over 2021.

“We do not think that most markets have been too quick to price in the end of lockdown and the recovery, and are still off the recent highs. The exception is Nasdaq, which has a disproportionate number of stocks that benefited from the virus.”

A new form of defence

Speaking of stocks that have ‘benefited’ from the virus, are asset managers currently viewing traditionally high-risk sectors, such as technology, as defensive plays?

To some degree at least, Harte at BNP goes along with this. “Whilst some managers may view technology as defensive as a result of the coronavirus (digital services were not disrupted by the lockdown), they proved defensive by virtue of the unique nature of the coronavirus shock.”

He adds that the more plausible driver of technology has been the view that the coronavirus has expedited trends in technology that were already evident before it struck.

“However, the risk for technology stocks may be that they have already discounted a considerable amount of future growth and could therefore be vulnerable to disappointment,” he warns.

Investment themes

Expectations that the pandemic is over may be too optimistic, and any slip-ups could impact markets negatively.

While it is true that governments and central banks have introduced extreme measures, more may be needed, particularly outside the US, where the scale of the measures doesn’t match the economic damage.

And as Blanchet stresses, the risk of policy mistakes cannot be underestimated.  Geopolitics will increasingly take centre stage the further we move toward the final phase of the US presidential election.

Given this backdrop, how are asset managers positioning their portfolios? Blanchet favours maintaining a balanced risk exposure and playing the rotation toward value and cyclical stocks.

“The markets were too fast in pricing the end of the lockdown and the recovery ahead. Current valuations are the result of a liquidity-driven rally and a continued monetary expansion. Markets are clearly addicted to central bank liquidity.”

Allocation strategy

In the second part of the year, Blanchet argues that a reality check on earnings growth has to be considered. Therefore, he suggests combining a high level of liquidity with some exposure to cyclical assets that offer high performance potential in the event that a favourable scenario plays out.

Blanchet insists liquidity is, has been, and will be a key variable in the new order.

“Keeping liquidity buffers is particularly important in this phase, as a second leg-down in the market can’t be ruled out. This will provide room to move into segments and markets that display attractive entry points.”

Nathanael Benzaken, chief client officer at Lyxor Asset Management takes a similar line.

“We believe allocating to liquid alternatives makes even more sense in the current context. In fact, against all odds, with major indices rallying back to near pre-crisis levels, it may even be more relevant now to consider building or adding to a “diversification” portfolio.

“Despite risks and uncertainties remaining high, the coronavirus crisis has created major dislocations that can be monetised by hedge fund managers.”

Harte at BNP is probably the most bullish. “Given our expectations that policymakers will continue to aggressively support the recovery through accommodative monetary and fiscal policy, we believe that the recovery in 2021 will be strong and that markets will move towards discounting a strong reflationary theme that will benefit value stocks.”