WEBVTT - Christopher Dembik Talks France's Investor Mood

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news, thegoing.

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<v Speaker 2>Prime Minister Sebastian Economy, meeting the Socialist Party this morning,

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<v Speaker 2>then the Greens and the Communist Party as well as

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<v Speaker 2>he's trying to discuss or build support for his budget

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<v Speaker 2>plans as we came down to that deadline. Though, I

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<v Speaker 2>want to get the perspective of Christopher Denbeck, senior investment

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<v Speaker 2>manager at Pecta Asset Management. Chris, great to see you,

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<v Speaker 2>Thanks very much for joining us this morning. From your

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<v Speaker 2>point of view, I mean, how do you view this

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<v Speaker 2>uncertainty in terms of framing for French assets.

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<v Speaker 1>Well, I don't see it. There's a big risk. I

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<v Speaker 1>think over the past two years we have seen that

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<v Speaker 1>the French economy is not performing quite well, mostly due

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<v Speaker 1>to the publical situation. We all expect uncertainty, political uncertainty.

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<v Speaker 1>We lost at least until the next prison election, so

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<v Speaker 1>we have until twenty twenty seven. I'm very pessimistic regarding

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<v Speaker 1>the outcome of the negotiation tonight. I have some contacts

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<v Speaker 1>in the government and apparently the bet is that love

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<v Speaker 1>a new election in November potentially, But even if this happened,

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<v Speaker 1>I don't think it will solve the situation. So for

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<v Speaker 1>most investors or even when you talk with companies, anyone

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<v Speaker 1>knows that investituation won't get better anytime soon, so we

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<v Speaker 1>are getting used to this. I had recently talks with

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<v Speaker 1>French investors, but on French debt in quite a large quantity.

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<v Speaker 1>What they told me is we're not afraid at all

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<v Speaker 1>because basically, over the past two years have reduced the

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<v Speaker 1>exposure to French assets. So everything has already happened. And

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<v Speaker 1>I guess I'm not only one pessimistic, but most of

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<v Speaker 1>the French business community is and nowadays.

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<v Speaker 2>So I mean, is there a worst case scenario then

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<v Speaker 2>if things play out? I mean, does having the Soucialist

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<v Speaker 2>party in the government now and not elections? Is that

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<v Speaker 2>better than having elections manivester point of view? I mean,

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<v Speaker 2>how do you look at the various scenarios?

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<v Speaker 1>Well, from an investor note of view, I think the

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<v Speaker 1>best is to have a new election or a technical government.

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<v Speaker 1>We're all quite afraid if we have a socialist or

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<v Speaker 1>far left to government. Obviously, I think one of the

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<v Speaker 1>biggest issue we've left is that the consider of the

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<v Speaker 1>French economy is in quite good chap. But as a

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<v Speaker 1>retul fact. If you look at economic activity, we might

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<v Speaker 1>be around the open five percent this year, and they

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<v Speaker 1>want to increase taxation. You know, you have all the

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<v Speaker 1>discussion how to increase much more taxation. I don't think

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<v Speaker 1>this is the right way to deal with the situation.

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<v Speaker 1>But if we have left government, we are without obvious

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<v Speaker 1>support from the far left. I think it's not good

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<v Speaker 1>for the economy. So most of the investors are quite

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<v Speaker 1>a free on taxation. Liveral is already quite high in France.

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<v Speaker 2>One of the key comments we've been watching this morning

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<v Speaker 2>is some former prime minister Elizabeth Bond, someone who brought

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<v Speaker 2>the pension reforms through Parliament when she was Prime minister.

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<v Speaker 2>She's now saying that she could be in favor of

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<v Speaker 2>suspending that reform. I mean, what's your view on that proposal.

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<v Speaker 1>Well, it's a complete nonsense. Nowadays we have in terms

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<v Speaker 1>of public deficit it will be around five point four

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<v Speaker 1>percent of GDP, which is one of the worst in

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<v Speaker 1>the Open Union. So let's say that you suspend very farm.

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<v Speaker 1>You need to find, according to my assessment, you need

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<v Speaker 1>to find every year between twenty and thirty billion year

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<v Speaker 1>or more. So, where do you find it. I mean,

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<v Speaker 1>we're enable evant to reduce the deficit at all. So

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<v Speaker 1>if you suspend very formally for political purpose, the issue

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<v Speaker 1>is that at the end of the day, your deficit

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<v Speaker 1>will keep increasing. So yes, clearly live investors or you

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<v Speaker 1>don't have speculative attack against the French debt. But right

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<v Speaker 1>now we don't know if it will happen. You know,

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<v Speaker 1>in the bond market, everything can fold down very fast,

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<v Speaker 1>so nowadays is very quiet. I expect it will remain

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<v Speaker 1>like that. But let's say that we susponn the bone

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<v Speaker 1>of the punsion reform. No one knows what's going to

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<v Speaker 1>happen on the bond market, so you could have speculative

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<v Speaker 1>attacks against French assets. So that's that's why I think

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<v Speaker 1>three not wise.

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<v Speaker 2>What sort of move? What that mean in terms of

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<v Speaker 2>yields or the spad Germany.

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<v Speaker 1>Well, let's say we're around for the ten year bond

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<v Speaker 1>market for the French government bones we're around three point

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<v Speaker 1>five three points seven percent film, which might be the top.

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<v Speaker 1>If we jump around four percent, it will be already

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<v Speaker 1>quite challenging, you know. I mean, we have seen it

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<v Speaker 1>for Greece, and I don't compare friends with grace, but

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<v Speaker 1>from one moment to another, almost over night, everything can

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<v Speaker 1>fold on. So that's why I think we need to

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<v Speaker 1>be very careful. And obviously foreign investors we don't look

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<v Speaker 1>at all the reforms that France is implementing, but we

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<v Speaker 1>all know that we need to be very wise regarding

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<v Speaker 1>the pension reform. So we need to be careful. And

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<v Speaker 1>if we suspend it, well, let's say, let's be very transparent.

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<v Speaker 1>It's not the suspension. It means that we will just

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<v Speaker 1>console the reform, so we will have sooner or later

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<v Speaker 1>on new debate about it. So it's not right solution

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<v Speaker 1>to deal with the situation. And I think from a

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<v Speaker 1>political point of view, it was not already enough to

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<v Speaker 1>do this reform, so we cannot get back to this.

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<v Speaker 2>Is that is the spending person one of the biggest risks,

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<v Speaker 2>the fascal lightlub.

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<v Speaker 1>Now yes, I mean if you look from twenty to seventeen,

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<v Speaker 1>half of inciece of public debt is only due to

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<v Speaker 1>the pension, so we need to deal with that. It's

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<v Speaker 1>not an what we have done over past few years,

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<v Speaker 1>so sooner or later we'll need to deal with that.

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<v Speaker 1>If we have left government, obviously we won't deal with

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<v Speaker 1>the situation because we left concider that there is no

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<v Speaker 1>pension reform issue. So what is striking is that for

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<v Speaker 1>some politician in France nowadays it's like France is a

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<v Speaker 1>complete is a country where all the rules of economics

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<v Speaker 1>does not apply. All other countries are nowadays implementing pension reform.

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<v Speaker 1>I think in Denmark, and you retire at seventeen years old.

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<v Speaker 1>Nowadays in France you want to get back to sixty

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<v Speaker 1>years solds It does not make sense and sooner or

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<v Speaker 1>letter you will pay it. You will pay it because

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<v Speaker 1>you will have higher cost of borrowing for the states,

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<v Speaker 1>but also for all the companies, or you can have,

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<v Speaker 1>in the worst case scenario, speculative attack against franch assets.

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<v Speaker 2>So how do you try the next eighteen months and

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<v Speaker 2>franch assets that roughly how long has left on Themania

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<v Speaker 2>Marcan's presidency at the moment we assume he will serve

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<v Speaker 2>to the end of his term.

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<v Speaker 1>How do very I mean very clear, and we have

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<v Speaker 1>done the same thing since over the past two years.

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<v Speaker 1>We have a lower exposure to franch assets even like

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<v Speaker 1>very strong companies let's say the luxury sector is obviously

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<v Speaker 1>strong in France. Very nice companies, but we see clearly

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<v Speaker 1>that all the French are sets are not performing quite well,

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<v Speaker 1>especially compared with over open A sets. And when I

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<v Speaker 1>discuss with other companies, even insurance companies, French banks and

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<v Speaker 1>so on, we are all doing the same thing because

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<v Speaker 1>we see it as a tail risk for the market.

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<v Speaker 2>Okay, Christopher Dan, but great to have you with us.

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<v Speaker 2>Thanks very much for joining us em Paris this morning.

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<v Speaker 2>Senior investment manager at Pectae Asset Management