Invesco's Read: French election more important than Greece

Invesco Perpetual's co-head of fixed income Paul Read has said April’s French presidential election is the “one to watch” for markets in 2012.

Speaking at Investment Week's Strategic Bond Focus event in London last week, Read conceded "anything could happen" with regard to Greece's bailout negotiations, but suggested outcomes had now been priced in.

"Banks have essentially provisioned for that scenario by writing off their exposures. If Greece goes there will be fewer buyers than sellers on the day, but it is no longer a turning point," he said.

But Read warned the real risk factor remained political in nature, with the French presidential election in late April a major event for markets.

Read said: "The one to watch is the French presidential race. That could be a source of volatility, particularly if [far-right candidate] Marine Le Pen were to knock out Sarkozy in the first round, because that would effectively mean Francois Hollande would be elected," Read said.

Hollande, the principal rival to incumbent Nicolas Sarkozy, has said he will reopen discussions on the new European treaty if elected, and has labelled the financial world his "enemy".

"I do not think markets would allow him to do what he is proposing, but the volatility will still be there," Read said.

German chancellor Angela Merkel has previously voiced her intention to campaign for Sarkozy during the election campaign.

In terms of asset allocation, the bond star said fixed income investors should look at low duration, high yield assets, and avoid developed world government debt.

He warned government bonds are fully valued in all but the very worst case scenario, with yields on treasuries, gilts and bunds all below 1% for maturities out to 5 years.

"Absent the world melting down there is no upside. They could trade sideways for a long time, like Japanese government bonds, but I do not think we have the Japanese deflationary mentality - certainly not in the US," Read said.

Read and Invesco's co-head of fixed income Paul Causer sold their exposure to government bonds in their £296m Tactical Bond fund in Q3 last year.

"The medium to long term implications of everything going on have to be reflationary. Personal and government balance sheets do need to be rebuilt, but you have got to have substantially higher government bond yields two to three years down the line," he said.

"Western central banks are a long way from raising interest rates, but even a 50% retracement of last year's moves - which would look like nothing more than a bit of noise on long-term trends - would result in a 5-10% capital loss."