Amundi: return to EM, DM credit; but too early for EU equities

January 28, 2019

LONDON (Reuters) – Amundi Asset Management, Europe’s largest fund manager, has recommended investors restart building exposure to emerging markets and developed market credit, assets which are often considered more risky, after last year’s brutal sell-off.

According to the French asset manager’s analysis, market participants priced in twice the slowdown risk that economic fundamentals justified.

“We think that risk assets have now reset to more attractive levels and some “entry points” for long-term investors are materializing in emerging market (EM) assets and developed market (DM) credit,” Amundi said in a research note by chief investment officer Pascal Blanque.

Within EM, the asset manager believes equities are the most appealing, followed by bonds in local currencies and hard currency debt. Local currency debt is expected to deliver higher returns and higher volatility than hard currency debt.

That’s a change from last year when Amundi was very cautious on EM debt in local currencies, believing pressure on currencies was too high.

In DM credit, more dovish central banks and decent economic fundamentals make it more appealing, but investors should be highly selective given the high leverage in the system, with corporate debt at record levels in the United States, Amundi said.

It’s still too early to return to European equities due to uncertainties around the European elections in May and the UK’s divorce from the European Union, but opportunities may appear later in the first half, it added.

“We believe more robust opportunities will materialize later in the year as the European elections in May (and Brexit) could continue to weigh on investor sentiment,” the note said.

Amundi has 1.45 trillion euros ($1.65 trillion) of assets under management.

In general, though, Amundi reckons the market went too far in December, pricing in a recession, and “while we think risks are skewed to the downside, we have a more balanced view,” it said.

“Except in the case of an extreme shock, nothing leads us to bet on a recession in Europe or the United States for the next 18-24 months,” it said.

Amundi is more inclined to bet on convergence towards potential growth, with a second half of the year more favorable than the first.

($1 = 0.8764 euros)

(Reporting by Josephine Mason, Editing by Helen Reid)