Europe’s path to strategic autonomy opens new opportunities for bond investors

Talking Heads podcast with Fadi Berbari

Christopher Iggo: Hello, and welcome to this week’s edition of the BNP Paribas Asset Management Talking Heads podcast. Every week, Talking Heads will bring you in-depth insights and analysis on topics that really matter to investors. In this episode, we’ll be discussing Europe and the theme of European strategic autonomy, which is all about Europe building up more autonomous resilience across a number of sectors, including defence, energy, communications, and technology. I’m Chris Iggo, a member of the Investment Insights team at BNP Paribas Asset Management. I’m joined today by Fadi Berbari, a Senior Portfolio Manager in the Fixed Income team at BNP Paribas Asset Management in Paris. Welcome, Fadi, and thank you for joining me today.

Fadi Berbari: Thank you, Christopher.

CI: We’ve heard a lot about this theme of strategic autonomy. Why has it become such a big investment subject?

FB: We are coming from a big one-world situation. [The] geopolitical [issue] is becoming a real subject. China is getting bigger and bigger, India is bigger, [the] US is more and more alone, and we have seen rising fears in Europe, starting with Covid, and then entering back into [an] era of war between Russia and Ukraine.

We are having changing climate conditions, so a lot of threats that Europe has to face today, probably alone, with a political and economic system that has to be protected. So, a lot of European[s] are cautious. One way for Europe to be still in the worldwide race is to grow together into an independent and strong Europe built all together.

CI: That’s the background to what we’re discussing. Could you give us a flavour about what the key initiatives are, which sectors are in focus, and the absolute scale of the investment that’s going to be required in [the] coming years?

FB: We’re talking about four or five big initiatives to put Europe into the race: Rebuild Europe, re-arm Europe, [the] European Chip Act, European Infrastructure Rebuilding. We are talking about €2 trillion of investment, so it’s quite huge. That’s the first time Europe is so involved in helping the [member] states rebuild and reconnect their economies, so that means that a lot of European industry.

CI: Climate change has sparked big growth in the green bond market. We’re seeing it in technology, with US companies issuing lots of bonds to fund their capital spending. Could you articulate a bit more about the role European bond markets will play? Who the key issuers are going to be, and what benefit does it bring to bond investors?

FB: Two elements. One is what it’s going to bring for European industry, a lot of compan[ies], not one great company, and [a] few of them are [have] gone to state agenc[ies] to create [a] crypto-communion of private and public. It’s a mix to ensure a fuller allocation of capital. So the idea is to capture this to [for] our customer[s] who are expecting a good generation of return through the period, and most important, stability and visibility of the investment. [We are] a team that talks to Europeans, [who] are very keen on their own independence and protecting their own model and investing into their own company, wanting to take back control of their investment.

CI: Obviously, it’s not just about the bond market. There’s a lot of equity financing as well around this theme. What are the major differences in approach between the equity route and the fixed income route?

FB: We are offering the ability to invest into equity bonds, probably private assets in companies that want to be funded several way[s]. We are building this approach exactly the same way, sharing what is strategic for Europe. On equity, you can just buy public listed and quoted equities on stock markets, whereas on the bond [side] you have bigger momentum, [a] bigger market, because you can fund private companies [as well as] publicly listed and state-owned compan[ies].

CI: Some European countries have very high levels of government debt already. Does this additional borrowing become problematic at some point?

FB: The aim is not to fund states. There is enough public funding available for states, and we wanted to focus on what is important for Europe, and to be sure that what is important for European investors is funded properly. If you look to the United States, there is a lot of also indebtedness for [the] US government, probably more than Europe. Europeans are quite rich, and the capital in Europe is quite high – we have big pension funds, we have a lot of money retained in the banks. We have asset managers in Europe that can help compensating the indebtedness of states, so [the] situation is not so bad. By launching this thematic [strategy, we want] to be sure the money is going on the right vehicles, which matters for the person interested in European autonomy.

CI: The side effects are that this is all good for the broader European economy in terms of job creation and living standards. So it has many benefits.

FB: I wanted to specify something when we talk about [the] European economy. We’re not talking about the Eurozone. Europe for us start[s] at Malta and finish[es] in Estonia. We are talking about Europe geographically, and we think cooperation in a lot of sectors is more important than the borders – look, for example, [at] our British friends. A lot is going through with Europe into technology, into defence. A lot of cooperation, sharing technology, sharing know-how, sharing the burden of climate change, and cooperating in [a] peaceful way and not just fighting for political reasons.

CI: Well, thanks, Fadi. It’s a very important topic, and it’s good to hear that investors are playing a role in providing the finance for these important initiatives. So, thanks very much for joining me today.

FB: Thank you, Christopher.

CI: That’s it for this week’s episode of Talking Heads. If you would like to learn more about this and other investment insights, please reach out to your BNP Paribas Asset Management contact, or check out Viewpoint, our website for investment insights at viewpoint.bnpparibas-am.com.

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You’ve been listening to the BNP Paribas Asset Management Talking Heads podcast with me, Chris Iggo, and Fadi Berbari from the BNP Paribas Asset Management European Fixed Income Team.

We hope you’ve enjoyed it, and please do join us again on Talking Heads next week. Until then, take care.