General Re-New England Asset Management Inc., a unit of Warren Buffett’s Berkshire Hathaway Inc. (BRK/A), said investors seeking to cut risk in Spain and Italy are paying too much for French sovereign debt.
“France is significantly overvalued,” GR-NEAM Chief Investment Officer John Gilbert wrote in a newsletter on the unit’s website. The country should be paying 4.5 percent to 5 percent yields on 10-year bonds based on its risks, closer to Italy and Spain’s rates than what Germany pays, he said.
Yields on France’s 10-year government debt have slid to about 2.1 percent from more than 3 percent at the end of last year. The yield on similar maturity German bunds fell to 1.34 percent today, while Spain’s debt rose to 6.47 percent and Italy’s climbed to 5.82 percent.
France, the euro area’s second-largest economy, has benefited as investors fled weaker neighbors including Italy and Spain, which are struggling to rein in borrowing costs amid the currency bloc’s debt crisis. Investors should be wary because France’s businesses have lost competitiveness over the past decade and labor costs are higher than in Germany, Gilbert said.
French jobless claims rose to the highest in 13 years in July as stalling growth prompted companies to trim payrolls, a Labor Ministry report yesterday showed. The country is also facing a ballooning trade deficit.
“We do not know if the markets will turn on France,” Gilbert wrote in the document dated August 2012. “It is possible that France will simply continue to get a bye on size - - it is a big country with a big enough market to absorb funds fleeing weaker venues. But investors making such a bet appear to us to be whistling past a graveyard.”
Buffett, Berkshire’s 81-year-old chairman and chief executive officer, cut holdings of Spanish, Italian and French bonds about two years ago, he told CNBC last month. About 80 percent of the Omaha, Nebraska-based company’s non-U.S. sovereign debt holdings were in Germany, the U.K., Canada, Australia and the Netherlands as of June 30, according to a regulatory filing.
GR-NEAM had $67.7 billion in unaffiliated assets under management as of March 31, according to its website. The Farmington, Connecticut-based unit primarily serves insurers.
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