Goldman Sachs downgrades euro investment-grade bank debt on France's fiscal risks

* Goldman Sachs downgraded euro banks' and autos' debt * Euro bank debt spreads have tightened, limiting investment appeal Oct 10 (Reuters) – Goldman Sachs has downgraded its rating on euro-denominated investment-grade bank debt to "underweight" from "neutral", citing fading demand for cyclical sectors and persistent fiscal challenges in France. The U.S.-based investment bank remains cautious on French issuers due to the fluid political landscape and France's challenging fiscal outlook, it said in a note published on October 9. French assets were jolted earlier this week after Sébastien Lecornu, France's fifth prime minister in just two years, tendered his and his government's resignation, mere hours after unveiling the new cabinet line-up. "In a carry-driven market, that leaves limited value in keeping a neutral allocation on the sector," said Lotfi Karoui, an analyst at Goldman Sachs. "Beyond valuation, we think sovereign fiscal risk, most notably in France, poses more downside risk to the banking sector." Goldman Sachs said the spread premium for euro investment-grade bank debt "is decidedly a thing of the past", noting that the sector has been trading at tighter spreads than the rest of the euro investment-grade index. Goldman Sachs also shifted its stance on European auto debt to "neutral" in both investment-grade and high-yield segments, citing recent strong performance and ongoing structural headwinds, including rising competition from China. Auto debt refers to bonds or other fixed-income securities issued by companies in the automotive sector. "High yield auto spreads now sit near the 30th percentile rank when benchmarked to the history since 2021. These levels are fair, in our view, given enduring structural headwinds in the sector," Karoui wrote. The firm noted that cyclical sectors in the euro high-yield debt market have underperformed and expects this pattern to persist until "tangible signs of growth acceleration emerge." Goldman Sachs said it expects better investment prospects in insurance, real estate investment trusts (REITs), and tier-II bank debt securities. (Reporting by Akriti Shah in Bengaluru; Editing by Rashmi Aich)

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