Dennehy: France is the new Greece
The country’s debt dynamics and dysfunctional politics make its investment potential closer to that of Greece than the UK.
Investors should sell out of funds they hold that are exposed to France, according to Brian Dennehy (
pictured), of fundexpert.co.uk.
The managing director says that the country has become one of the biggest risks to investors' portfolios due to its exposure to the eurozone crisis, but fears many have failed to spot the looming threat.
“Debt growth in France is on a remarkably similar trajectory to Greece. Investors are taking risks of which they are unaware" he said. “We recommend selling any fund over-weighting France, and remain cautious of all European funds.”
Dennehy says that French banks are highly exposed to the debt of the peripheral European countries, leading to the often-repeated accusation that austerity in those countries is a way to bail out French and German banks.
The possibility of an exit of Greece from the eurozone would also strike the Gallic country hard, Dennehy says, warning those who think a ‘Grexit’ is priced in that it could result in a 2008-style crash.
Up to this point European funds have held up reasonably well by avoiding the periphery, but Dennehy thinks the problems are rapidly spreading to the core.
He points to the underperformance of funds with the largest exposure to France as a sign of things to come.
Funds with the highest exposure to France
Source: FE Analytics
He believes the country is suffering from a debt level similar to the US and the UK, but crucially lacks the political will to change.
The policies of new President Francois Hollande amount to a "bizarre fantasy" in Dennehy’s view, with the pension age reduced when it should be raised and the minimum wage raised when it should be lowered.
“Hollande may know how to work the political system, but, as one analyst put it, “he has the economic understanding that God gave a goose”,” he said.
Furthermore, he says the breakdown in the relationship between France and Germany is ominous for the country, with Chancellor Angela Merkel having widely different ideas about the appropriate policy response to the crisis.
Merkel won’t agree to the eurobonds that Hollande believes will help solve the crisis, while Hollande won’t agree to tighter political union.
Hollande’s preferred policies of more stimulus spending, more government workers and greater barriers to firing employees are all rejected by Merkel, Dennehy says.
Dennehy's comments differ widely from those of RWC's Ajay Gambhir, who believes the continents markets are returning to normalcy after a period of extreme, macro-driven volatility.
Ghambir, who manages RWC European Alpha, said that the fear of the mass of investors was creating opportunities for stock-pickers to make strong gains, and the European market was due to see large inflows as investors' concerns focused more on the US economy and a slowdown in China.
Earlier this week FE Trustnet looked at top-performing funds for those who were bullish on the continent’s prospects.