European Deflation to Hit Asset Managers’ Bottom Line

Deflation in the Eurozone could cause underperformance across asset classes and investor outflows, Fitch Ratings has said.

Deflation could hit the profitability of European asset managers who have not diversified outside the region, according to Fitch Ratings.

The research agency said there was a real possibility for deflation in the Eurozone—with inflation falling to 0.3% in August 2014 from 2.6% in September 2012—and the effects could be harmful to asset managers invested in the region.

“Deflation would affect the European asset management industry through asset price declines (and hence, performance) and potentially shifts in flows within the industry (i.e. to non-Europe focused products for example),” Fitch Ratings said.

The falling asset prices would have a negative effect on the fixed income markets, the agency said, by causing interest rates and debt burden to rise. Fixed income issuers would also experience a bump in default rates.

European equity markets would also suffer in performance in a deflationary scenario, according to the report. Such underperformance would bring down asset manager profitability through reduced assets under management and fee income.

Fitch Ratings recommended equity managers to secure low leverage to “protect their creditworthiness.”

Managers with assets primarily focused in the Eurozone—including those in credit boutiques and niche collateralized loan obligations—are at the highest risk of underperformance and investor outflows, the report said.

However, Fitch Ratings argued asset managers could protect their business and performance from the harmful effects of deflation by diversifying their assets and investors.

“In a deflation scenario, those managers with a range of non-Eurozone products will be better positioned than those with a majority of products focused on the Eurozone,” it said.

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