France in Fed taper line of fire

When France’s weak economy and public finances are panned by international critics, its politicians have an easy riposte: just look at our bond yields.

Paris can borrow at lower costs than London, and the spread between French over German 10-year bonds has remained remarkably stable over the past year. Standard & Poor’s early morning announcement two weeks ago of another downgrade – this time to double A – failed to cause markets to choke on their croissants. Investing in French assets cannot be so awful.

Could that change as the US Federal Reserve starts to wind back its exceptional stimulus measures? Among investors I have spoken to recently, a school of thought is developing that it might.

During the global “taper turmoil” earlier this year – the weeks after May 22, when Ben Bernanke, Fed chairman, first hinted at his plans to taper, or scale back Fed asset purchases – eurozone bond markets remained surprisingly tranquil, even as emerging markets sold off sharply.

But while global policy makers and economists still struggle to understand the interlinkages between Fed actions and global markets, it seems implausible that Europe can escape unscathed when tapering becomes real, perhaps as early as December. After all, “global QE” – quantitative easing by the Bank of Japan as well as the Fed – drove European bond prices higher and yields lower; taper turmoil showed the potential for disruption when it goes into reverse.

Stabilising factors

If there will be European fallout, where will the effects be worst? Intuitively, the weaker eurozone “periphery” economies seem most at risk of a market correction as global QE ebbs, especially if fresh taper turmoil increases investors’ risk aversion.

In fact, countries such as Spain, Italy and Ireland have benefited from four stabilising factors this year.

First has been their transition – thanks to the European Central Bank acting as a backstop – from existential crises to something nearer normal economic conditions. Growth is low and unemployment alarmingly high, but the danger of imminent ejection from the euro has gone.
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Second, at least Irish and Spanish bonds have benefited as turnround stories, with tangible evidence of structural reforms improving competitiveness and growth prospects.

Third has been the “re-domestication” of Spanish and Italian bond markets – fickle foreign investors have fled.

Fourth, eurozone periphery countries have moved decisively from current account deficits to surpluses; they no longer rely on capital from overseas.

All four supporting factors will remain in place even as the Fed tapers. None, however, apply to France. Instead other reasons explain the impressive performance of France’s bond market this year – and why it might now be vulnerable.

Higher bond yields

When the Fed was ramping up its asset purchases and US Treasury yields were falling, global investors looking for higher returns were attracted by France’s large and liquid bond markets. Until June this year, French 10-year yields were higher than US equivalents.

France was considered part of the eurozone’s safe, northern core, which made it attractive to investors for whom German Bund yields were simply too low. The Swiss central bank was an avid buyer of French bonds, as were Japanese banks.

"Whatever the risks posed by Fed tapering, it is hard right now to see what might trigger another big sell off"

The case against France is that if the Fed slows its asset purchases and US Treasury yields rise, those inflows could start to reverse and French bonds would sell off – perhaps sharply.

Eric Chaney, chief economist at Axa, points out the very different debt profile between France and Germany. As a share of GDP, French public sector debt will soon be 20 percentage points higher than Germany’s. Without action to alter France’s debt dynamics, the spread between French and German bonds could widen by 50 or 100 basis points, warns Mr Chaney.

French politicians probably need not worry just yet. Investors shorting French bonds have often lost their berets.

When French yields have hit instability in the past, it has been because of obvious systemic risks – the exposure of its banks to the eurozone “periphery” economies in 2011, for example. Whatever the risks posed by Fed tapering, it is hard right now to see what might trigger another big sell off. As the eurozone crisis has lost intensity, eurozone bonds have performed more like “rates” markets, with yields linked to growth and inflation prospects, rather than default risks. France’s economy is contracting, which will curb any uptick in yields.

Still, as Fed tapering draws near, markets may make life less comfortable for French politicians – and limit their bond yield bragging possibilities.

Source: http://www.ft.com/intl/cms/s/0/d1742d9e-5149-11e3-b499-00144feabdc0.html#axzz2lIoVJMpj

Carrefour: Bread, cheese, new boss?

LAST summer, amid rumours that he was about to be sacked, Lars Olofsson was given another six months to revive Carrefour, the world’s second-biggest retailer. His time is up.

Carrefour’s performance has grown mouldier since then—and not in a good way, like Roquefort cheese. In November 2011 it lost market share in France, its home market, which accounts for 42% of sales. This came after several profit warnings, a string of U-turns and a Brazilian merger plan that ended in failure. Carrefour’s shares fell by 45% between January and December last year. Another profit warning may come on January 19th, when the firm will announce its quarterly results—and possibly Mr Olofsson’s future.

Carrefour’s woes are not all the chief executive’s fault. Mr Olofsson took over a struggling firm with a passé business model that mainly operates in a stagnant part of the world. However, he compounded these problems with inept management. A gifted marketer, he can make unrealistic goals sound reachable; but he cannot make them so. His plans for Carrefour have had to be revised more than once.

Mr Olofsson is under pressure from Bernard Arnault, the boss of LVMH, a luxury-goods group, and Colony Capital, a property-investment firm. The two jointly own 16% of Carrefour’s shares and 22% of the company’s voting rights through Blue Capital, an investment vehicle. The stake they bought in 2007 has halved in value, so they are urging Mr Olofsson to pep up the stock price quickly. This makes it harder for him to devise a long-term strategy to turn around the sausage-laden supertanker.

In the past, Carrefour had three strengths: low prices, a vast range of food, clothes and white goods, and the convenience of having all those things in one place. Today shoppers can find low prices and infinite choice online, so fewer bother to drive to an out-of-town hypermarket.

European demography hurts Carrefour, too. Populations are ageing. More people live on their own. And whereas big families buy in bulk, singles tend to shop locally, frequently and in small quantities. “Hypermarkets are not dead, but they are outdated,” says Natalie Berg at Planet Retail, a research firm.

Mr Olofsson has invested hundreds of millions of euros in a revamp called “Carrefour planet”. The new stores boast “beauty areas” with gleaming cosmetics counters and “organic areas” with mountains of organic food. Alas, building a “planet” shop costs twice as much as an ordinary hypermarket. And cash-strapped European shoppers want bargains, not overpriced vegetables. “This is not a good time to refit and renovate the stores,” says Jérôme Samuel of HSBC, a bank.

Carrefour depends too much on products that are in long-term decline, says John Kershaw at Bank of America Merrill Lynch. Its sales of white goods, books, DVDs and electrical gadgets shrank by 20% over the past four years. It needs to offer cheap food, which never goes out of fashion. But its hypermarkets are 8.8% more expensive that the cheapest rival, according to J.P.Morgan Cazenove. As the biggest retailer in France, Carrefour has the clout to cut prices by more and for longer than its rivals. But it hasn’t done so.

The next boss of Carrefour is likely to be French. Thierry Breton, a former economics minister, could be a candidate. Georges Plassat, a former boss of Casino, another supermarket chain, has indicated that he wants to stay in his current job as boss of Vivarte, a retail group. Noël Prioux, the head of Carrefour France, is another possibility, though he started his current job only in June.

Carrefour has a good business in emerging markets and owns property worth an estimated €17 billion. Having decided to pull out of markets where it is not in the top two, it has a hefty market share in 32 countries. Yet Carrefour is still concentrated in Europe, especially France. Growth in Asia cannot make up for flops at home. Indeed, if the company does not perk up soon, investors may demand that its fizzy emerging-market business be spun off from its flat European one.

Source: http://www.economist.com/node/21542804