Weak EU economies need to turn around, warns fund manager

Financial markets’ relief at electorial victories by centrist parties and candidates in Europe may prove short-lived if weak economies are not turned around, according to a fund manager in the US firm that snapped up about 10 per cent of Irish State bonds during the financial crisis.

"My big concern for Europe in general is . . . if the current governments coming in don't do anything to fix stuff, then in four or five years the populists are going to have much stronger hands," David Zahn, head of European fixed income investments at California-based Franklin Templeton, said in an interview with The Irish Times at the ACI Financial Markets Association World Congress in Dublin.

The past six months have seen moderate politicians beat far-right, anti-immigration candidates in Austrian and French presidential and Dutch parliamentary elections. This has come as a relief to the European establishment and financial markets after anti-establishment sentiment fuelled the outcome of the Brexit referendum and Donald Trump’s election as US president last year.

Parliamentary elections

In France, the incoming centrist French president Emmanuel Macron, who beat far-right candidate Marine Le Pen in a run-off vote last weekend, "is going to struggle to get a majority" in parliamentary elections next month, Mr Zahn said.

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“Will he be nearly as reformist as some people hope he is? I guess I’m slightly more sceptical than most,” he said, adding that his fund doesn’t hold any French bonds. “I think people are disenfranchised.”

France is dogged by anaemic economic growth, a bloated public sector and an unemployment rate of at least 10 per cent over the past five years, during which Ireland’s jobless rate fell from 15.1 per cent to 6.2 per cent.

Franklin Templeton hit financial headlines after one of its fund managers in the US, Michael Hasenstab, made an audacious bet on Irish government bonds in the middle of 2011 as Moody's, one of the world's leading ratings agencies, downgraded the country's credit rating to "junk" and the yield on the nation's 10-year bonds rose above 14 per cent. However, Mr Zahn's European funds also separately bought into the prospect of Ireland's recovery during the same period.

Sold positions

While Mr Hasenstab’s main funds sold their entire $11 billion (€10.1 billion) position in Irish bonds between 2014 and last year, Mr Zahn’s portfolios continue to hold Irish debt, even though they sold much of their positions in the second half of 2016.

Still, Mr Zahn said the yield – or market interest rate – on the Government's bonds needs to widen against similar German securities in order for his funds to look at buying more Irish debt, as the Republic will be the European Union economy most impacted by Brexit.

“We’re not talking about a big sell-off, but there’s some risks to the Irish economy due to Brexit,” Mr Zahn said. The yield on Irish government bonds, at 0.84 per cent, is currently 0.47 percentage points higher than those on German notes. Mr Zahn said the differential would need to widen to 1.50 percentage points to make Irish debt “compelling” for his funds.