European asset managers “worst hit” in deflation scenario, Fitch warns

European flagsDeflation in the eurozone would adversely hit European asset managers with a bias towards eurozone activity as declines in

asset prices across various sectors would lead to poor fund performance and investor outflows, a report say.

Asset managers with primarily a eurozone footprint would be the worst positioned in a deflationary scenario, whereas more diversified players would fare better, Fitch Ratings says.

In April this year, Fitch upgraded Aberdeen Asset Management's credit rating partly because diversification of its revenues means the company, like others with a range of products focused beyond the eurozone, will be better positioned than those with a majority of products targeting eurozone assets.

Credit boutiques and niche loans managers are among those facing more risk due to their high exposure to eurozone high yield assets. The rapid growth in the high yield market has increased the number of highly leveraged issuers, which would be most at risk.

Eurozone investment-grade corporates, on the other hand, have considerable financial flexibility owing to stronger balance sheets after several years of cash hoarding and favourable funding conditions, Fitch says.

Both fixed income and equity investments could be hit in a deflationary environment, Fitch warns.

Although Fitch's base-case macroeconomic forecast is for the eurozone recovery to gradually strengthen and to avoid deflation, which would, broadly speaking, support the European asset management industry, the ratings firms says other outcomes are possible and risks are skewed to the downside.

With eurozone inflation falling to just 0.3% in August 2014, from 2.6% in September 2012, the prospect of deflation in the eurozone presents a "meaningful and growing risk", says Fitch.

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