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France is black mark in hunt for European bargains
France represents the biggest threat to an increasingly stable eurozone, say investors.
France presents the biggest threat to eurozone stability, according to global investors managing $664 billion between them, though the crisis in Europe takes second slot behind the US fiscal cliff in money managers’ list of potential woes.
Investors have been gradually mopping up European shares at knock-down prices. And for the first time since November 2010, fund managers have a bigger weighting in European equities than in US shares. They are still largely avoiding domestic focused sectors in Europe though, according to the survey from Bank of America Merrill Lynch (BoA ML).
Even though the fiscal cliff is a bigger concern than the eurozone crisis – 22% see EU debt concerns as the ‘biggest’ tail risk, down from 65% in June – fund managers are still worried about weak growth and European corporate profits.
France, the second largest economy in the single currency bloc, was deemed by 31% of investors as posing the greatest ‘tail risk’ for Europe. Though BoA ML had not asked this question before in its monthly survey, Spain and Italy are normally seen as the most likely of the eurozone nations to re-ignite a full-blown crisis.
Although France has narrowly escaped technical recession so far this year, there are growing concerns about the lack of competitiveness of its economy and its reliance on government spending, as well as the exposure of French banks to its neighbours' economies.
Though France’s debts aren’t as bad as some other countries, investors are concerned by the lack of will under president Francois Hollande to make reforms.
So far bond markets, which have punished other countries like Spain and Italy, have given France the benefit of the doubt.
But while Fitch has maintained France’s credit rating at AAA (with a negative outlook), Moody’s downgraded France in November and Standard & Poors’ did the same in January.
Investors optimistic about 2013 - but not Japan
Overall, the tenor of the BoA ML survey is one of increasing optimism about global economic growth and stock markets. This coincides with upbeat forecasts from banks and investment houses for the year ahead after most major financial asset classes made surprisingly strong gains this year in spite of concerns over the eurozone, Chinese economy and impending US fiscal cliff.
The BoA ML survey, conducted from 7-13 December before this weekend’s Japanese election handed victory to stimulus-friendly Shinzo Abe, showed the Japanese stock market remains a big underweight for investors.
Emerging markets were the preferred regional overweight.
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