Groupama urges caution ahead of further downgrades

February and March will be crucial months for France, Italy, and Spain, says Groupama Asset Management, as the firm anticipates further sovereign, bank, and corporate downgrades in the Eurozone but calls for investors to hold their nerve amid the turmoil.

Volatility will worsen in the months ahead but 2012 will end better than 2011 for equity market investors, with key indices set to close around 10% higher, the asset management firm said.

Groupama is asking investors to maintain their "prudence", despite expected further sovereign, bank, and corporate downgrades in the Eurozone over the next six to 12 months.

The downgrades will occur "in chain", the firm said, with ratings agencies to target sovereigns first followed by banks and some corporates.

The chain began with France's sovereign debt downgrade from AAA to AA by S&P on Friday 13 January, a decision Directeur des Gestions Fondamentales at Groupama Philippe-Henri Burlisson said had already been priced in by the market.

"The spread between France and Germany had already moved. One month ago, at 200 basis points, risk of a downgrade of two notches was nearly priced in."

But while the downgrade was not as severe as it could have been at one notch rather than two, a negative outlook “opens the door to other downgrades", he said.

"The second risk is in the hands of the other ratings agencies whom so far are not speaking in the same way", Burlisson added, referring to market confusion that arises from different methodologies used by S&P, Moody's and Fitch.

Despite bad news expected early on in the year, the firm maintains there are opportunities for investors.

Volatility in corporate risk premiums has potential to reduce, while weak default rates make credit an attractive investment class, the firm said in a presentation.

"Businesses have cleaned up their balance sheets giving support to credit," it added.