1998 remains a good year
The summer market storms are more and more seasonal. But they still take everybody by surprise. "Even the money managers, who have many options to hedge their investments at virtually no cost didn't do it", points Dominique Hartog, CEO of Véga Finance, a subsidiary of Caisse des Dépôts in Paris. But the market drop had just cancelled previous gains for the year, notes Hartog. So after the market has bounced back some 15% from its lows, he considers 98 remains a good year, and even a very good one for bonds. That difference is probably what makes French institutions feel so immune from the equity slump, as they mostly invest in fixed income.

The specific of French institutions also relatively insulate them from intra-year worries. "As their accounting usually goes on an annual basis, they only have to take provisions for market losses at year end", hints Hervé Douard, partner at Fixage, an asset-liability consulting firm in Paris. As long as the Paris Bourse didn't really drop below its year opening level, institutions were not threatened. "What hurts more institutional investors is the interest rates drop" mentions Hervé Douard. With 10 year government bond yields plunging below 4% in early October, most institutions faced a huge dilemma to invest new cash flows.

Many institutions reinvest their proceeds
To that regard, the market drop gave them some incentives to increase their equity exposure at lower costs. "Many institutions remained buyers at the end of August, and haven't stopped buying until now", observed Jean-Claude Leconte, president of Image & Finance, a consulting firm which surveyed French institutional investors earlier this year. The 70 institutions he studied had 75% of their long term assets in bonds, almost entirely French, and 25% in equities, of which three quarters at the Paris Bourse. Such a little exposure to equities, and international markets in particular, shielded them from the turmoil. But even those who had sold at market peak feel now forced to reinvest their proceeds.

"We had taken advantage of the market rise to sell a part of our convertible bonds and equity exposure, but not all of it, because other investments were hard to find", says Jean-François Naud, CEO of MAVPS, a mutual company with 45 billion francs (6,8 billion euros) in life insurance assets. After having parked most of its gains in cash, MAVPS considers investing in equities again. But only with that caution French investors always had toward the Bourse.

Gilles Pouzin