(Bloomberg) -- As anti-establishment parties gain ground across Europe, French President Emmanuel Macron is seen by many investors as a beacon of hope in the region.
But not all are buying it. Franklin Templeton Investments fund manager David Zahn is avoiding French bonds, believing Macron has piled too much on his plate to pass structural reforms. After betting on Italy last year, he is now putting money on Poland. That makes him a contrarian in a market that has pushed the yield spread of French bonds over Germany to lows last seen in 2016, while Polish yields have surged in the past month’s emerging-market selloff.
“We don’t own any French government bonds...Everyone thinks he’s going to fix France tomorrow,” Zahn said to reporters at a briefing in London. “Central Europe has been under-focused on and we think Poland actually offers good yields.”
Zahn, who helps oversee $732 billion, believes the yield on French bonds should be at levels closer to those of Spain than Germany as Macron faces opposition at home and abroad. French 10-year yields were at 0.83 percent Wednesday, with those on their Spanish counterparts at 1.39 percent. German 10-year yields were at 0.60 percent.
Polish yields, which have climbed 20 basis points this month to 3.28 percent, are attracting Zahn. Zloty assets have been hurt by a selloff across emerging markets, with investors also concerned by the government’s spat with the EU and dovish monetary policy. Polish economic growth is still more than double that of the euro area.
Franklin’s European Total Return Fund, which has 7 percent in zloty-denominated assets, is in the top six percent of comparable peers over the past year, according to Bloomberg data.
In a previous contrarian stance, Zahn was bullish on Italy’s debt a year ago even as strategists warned it could be at the center of Europe’s next crisis, and the nation’s bonds climbed after that. But with populist parties now close to finalizing a government, he is no longer keen.
“We’ve been underweight Italy for the last three or four months and we will remain underweight Italy until we get a better understanding of what this government’s going to do,” he said. Italian 10-year bonds slid on Wednesday.
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