LONDON — Investors have pulled €1.04 billion (£890 million, $US1.1 billion) out of European investment grade credit funds over the last week, JPMorgan said in a note to clients on Monday, the largest weekly outflow on record.
Analyst Matthew Bailey and team say in the note: “In our view, this represents foreign ‘tourists’ in the asset class pulling capital out of Europe due to political risk. Dollar assets seem to be the beneficiary of these flows: USD IG [investment grade] has seen a return of +0.6% year-to-date, while EUR IG has lost 0.1%.”
The exodus of investors from the European bond market is a result of “a non-trivial risk of hitting an electoral landmine,” JPMorgan says, with elections looming in the Netherlands and France.
Bailey and team say: “The victory of an anti-establishment politician such as Geert Wilders [in the Netherlands] or Marine Le Pen [in France] could see the market start to price in redenomination risk, with periphery credit underperforming.”
Both Wilders and Le Pen are right-wing, anti-immigration, anti-EU candidates and a victory, or even a better than expected performance, for either candidate could spell trouble for the EU. Barclays warned earlier this year that Europe’s looming elections could undermine the EU by yielding weak or minority governments unable to adequately address the problems facing the eurozone.
BNP Paribas last week also warned that Italy still poses a political risk to the eurozone, with investors overlooking the country’s high government debt and ongoing bad debt problems in the banking sector.
Ratings agency S&P Global highlights in a separate note circulated on Monday that eurozone Sovereign debt yields have risen over the past six months, citing “expectations of higher inflation globally and perceptions of
political risk in Europe.” That’s despite robust growth forecasts for the eurozone.
JPMorgan says: “In our view, spreads now only provide just enough compensation for political risk, and so recommend that investors take profit before the election cycle gets into full swing.”