LYON: France losing AAA status is the biggest concern European investors should be focusing on, as many of them piled into French government bonds for the higher than usual yield, said Bruno Crastes (pictured) of H20 Asset Management.
Speaking at the Patrimonia 2012 event in Lyon, the bond star was unequivocal in his view on the main danger facing European investors in 2013.
‘The big risk weighing over Europe is a French downgrade,’ he told the assembled audience. ‘It is the last AAA country to pay above 2% yields.’
A large number of investors, from pension funds to large investment groups, have being buying up French government bonds due to this high yield and would suffer from the country losing its remaining AAA ratings.
He said that if France were to miss out on its target of bringing the budget deficit to the EU level of 3%, then it would be downgraded.
‘Investors won’t sell on financial results, or unemployment figures, they will sell France if it loses its AAA rating.’
For Crastes, anticipating these shocks is the most important step asset allocators and investors must take to prepare for the year ahead.
‘What will help next year, without any major macro event, is to invest in what people are not holding, so assets like European equities and others.’
‘The risk from a macro view is on what investors are holding today, so things like credit and high yield.’
His fellow panellist Pascale Auclair, the managing director of La Française AM, was in agreement with London-based Crastes, saying in 2013 investors could not afford to be risk averse.
‘Next year, we must not forget to take on risk,’ said Auclair. ‘The absence of risk offers zero return almost everywhere.’
‘We will still have the support of central banks. The volatility linked to a euro exit scenario will also create opportunities in some of these distressed markets.’
Apart from a potential French downgrade, Crastes said there was also the other side of the rating system to look out for.
‘For 2013, we also have to talk about the potential of upgrades of countries like Italy. That could lift the European bond sector.’