*

Goldman Sachs ( GS ) downgraded euro banks' and autos' debt

*

Euro bank debt spreads have tightened, limiting investment

appeal

Oct 10 (Reuters) - Goldman Sachs ( GS ) 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 ( GS ). "Beyond valuation, we think

sovereign fiscal risk, most notably in France, poses more

downside risk to the banking sector."

Goldman Sachs ( GS ) 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 ( GS ) 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 ( GS ) said it expects better investment prospects in

insurance, real estate investment trusts (REITs), and tier-II

bank debt securities.