Allianz GI’s Riddell: Markets underestimating ‘Le Pen risk’

Mike Riddell, fund manager of the £128m Allianz Strategic bond fund, says financial markets are significantly underestimating the potential risks of Marine Le Pen becoming president of France.

The French presidential election will be held on 23 April. Marine Le Pen, the leader of France’s National Front, is one of the candidates for the presidency together with Francois Fillon (Republicans) Benoit Hamon (Socialists) and Emmanual Macron (Independent).

Speaking to Fund Strategy, Riddell says while markets are pricing in improving economic scenarios, there is a risk the market is underestimating some political events in Europe, especially around the French elections.

He says: “What could really go wrong this year? We could have Le Pen being in charge of France. There is a chance of a big risk off move which could cause a bond rally. If Le Pen wins, we think the risk is really underestimated by global financial markets.

“The possibility of a large risk off move is much larger than markets are pricing in. If you think the odds of Marine La Pen being in charge of France is one in three, markets are not pricing in that. Credit spreads are very tight and volatility is very low so you’re not paid to take the risk.”

Riddell says globally the market is pricing in a very benign economic outcome, but “an improving economic outcome.”

For the UK, however, he says a higher inflation will continue to hit consumers.

He says: “As we get inflation higher that’s going to hit real incomes and it is not sustainable for consumption to keep going on. Meanwhile businesses are not investing, they haven’t invested any more today than they did in 2015 and that’s what drives growth cycles.”

The fund manager, who manages the Strategic Bond fund with Kacper Brzezniak, has a long duration position on government bonds, contrary to many of his peers.

He says: “We are very different from everyone else because we really like government bonds. The big narrative in the market has been reflation and the idea that growth will jump up on the back of Trump and that inflation will rise and that that was bad for government bonds.

“We are long duration on government bonds although we think headline inflation is going to rise in the next three months; that is inevitable because the oil price now is twice the price than 12 months ago. But underlying inflation is not higher than it was a year ago. In the Eurozone it is actually lower than 12 months ago, even in the UK, despite being higher because of lower sterling, recent data says it has grown less than expected.”