The head of European bonds at the world's biggest asset manager told Reuters on Wednesday he is optimistic about the outlook for France and is holding a large stake in its government debt ahead of presidential elections in April and May. Michael Krautzberger, who manages BlackRock's Euro Bond Fund, added that a recent market rout seeded by doubts over US President Donald Trump's fiscal stimulus was "healthy" and that investors had got ahead of themselves in expecting rate hikes from the European Central Bank.
Jitters around France's election, which is set to pit centrist Emmanuel Macron against far-right leader Marine Le Pen in May's run off, pushed the premium investors demand to hold French over German debt to its highest since 2012 last month. For Krautzberger that has been an opportunity to build up an "overweight" position in his fund. "French debt has been very cheap versus other euro zone countries in recent weeks, and we have been running a slight overweight position," said Krautzberger, who is also the chief investment officer of BlackRock's German unit.
"I am an optimist. I find it quite refreshing to see that someone like Macron, on a positive European message, is the favourite to win the election. "Also if something completely disastrous or un-European happens in France it would obviously not only be bad for France but it would have a negative read-through for other markets." Investors have been flocking to the safety of bonds and gold in recent days, sending riskier world stocks sliding, as Trump faces the first major legislative battle of his presidency.
Trump is trying to rally Republican lawmakers behind a new healthcare bill, and investors worry that failure could spell trouble for the promised tax cuts and regulatory changes that fuelled a market rally after his election in November. "I see that as a healthy development. Not a turning point but a reality check," said Krautzberger.
"The market was very certain and euphoric that all Trump's promises would come through, and now the current phase is a reminder that there are some implementation risks and possible time delays." Krautzberger expects the US central bank, which raised interest rates earlier this month, to hike another three or four times in 2017 as growth and inflation in the world's largest economy rebounds.
But he said market expectations that the European Central Bank may raise its deeply negative rates as soon as December this year are excessive. "Our main scenario is that the ECB will only move rates after they have stopped their government bond purchases. That would make it late 2018 at the earliest," Krautzberger said. "The possibility of an earlier rate hike is currently slightly overpriced by markets."
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