There has been a lot happening in European markets this year. When it comes to asset allocation decisions, how attractive is Europe now? Brian Tora examines the details
An unexpected consequence of the surprise decision of the UK to opt for Brexit has been to drive those nations that remain in the European Union closer together. One of the arguments put forward by the Leave campaign was that Europe was in danger of breaking up. How things have changed. As a fund manager friend of mine remarked recently, we’ve given those in the EU a common enemy. Instead of fighting amongst themselves, they are now united against perfidious Albion which has chosen to flee the nest.
There is probably more than a little truth in that, though it is almost certainly the case that, economically speaking, Europe is looking a more robust place than a couple of years ago. In part this must be down to a lessening of the perceived political risk. Following the UK referendum and Donald Trump’s election in the US, fears were rife that the votes due in Europe would underscore an anti-Europe feeling that was being vocally expressed around the Continent.
In the event, the Dutch and French elections reinforced the pro-EU voice within these key nations, while Angela Merkel’s re-election did not disappoint. Moreover, economic progress seems to be building, admittedly led by Germany and with a few sick Eurozone members still in evidence. Overall, Europe does look a more appealing place for investors than it did a couple of years ago when Leavers were forecasting the demise of this great political and economic experiment.
Not all plain sailing
This is not to say there are not issues to be aware of in Europe. Greece is failing to hoist itself out of the morass into which it descended, while Italy continues to cause concern over the potential collapse of its banking system. But the core nations are prospering and 2017, a year of elections with all that might have entailed for the future, is passing with fewer shocks than many feared. A new agenda is being created which might ultimately lead to a Europe closer to a Federal model, with a single finance minister and a more common approach to foreign policy.
For investors, the calming of the uncertainty created by the referendum vote and the myriad of elections (four major national ones, not to mention the Italian referendum) has allowed a more considered approach to be adopted. For many, the focus is now on Germany. Aside from being the largest economy in Europe, perceived wisdom has it that the Deutschmark, were it still to be around, would be significantly higher than the euro. Germany’s manufacturing and exporting industries can only benefit as a consequence.
Moving on up
As I write this, the indices for both Germany and France remain below all-time highs (though not by a great margin which is also the case in the UK, though not for North America), the FT-SE Europe ex-UK Index powers on. The belief seems to be that, without the political uncertainty of the various elections we have seen, Europe can pull together and motor on. Certainly, there does seem a lot of enthusiasm amongst fund managers for the world class companies that pepper the German market, while France is looking for a post-Brexit financial sector bonus.
There seems some merit in taking a positive stance towards a Europe which does look to be pulling together in a coordinated fashion and benefitting from a more robust global economy. The strength of the euro will, though, be causing concern in some quarters. In such an environment stock selection – and, indeed, fund selection – will be crucial. But then, in markets as international as ours are today, where a company is domiciled is becoming less important when it comes to making your choice as to where to place your money.
As to the future, we need to be adapting ourselves to a tighter monetary environment where the central banks play a less supportive role. The extent to which the pump priming that went on in the post financial crisis period found its way into supporting financial asset valuations is far from clear. Perhaps the ending of quantitative easing will have as little effect on markets as its introduction had on inflation – the usual consequence of money printing being a rising cost of living, which didn’t really happen this time.
A flight to quality
Investment is never straight forward. Europe is benefitting from a flight to quality at a time when the demons that have surrounded it have diminished, while those hitherto safe haven options, like the US and Japan, are beset with their own uncertainties. Don’t forget the UK, though. At the end of 2015 the sterling/euro exchange rate stood at over €1.40 to the pound, making a euro worth around 71p. Even just ahead of the referendum the rate was €1.31 or a little less than 77p for a euro. Since then the euro has been as high as 93p and was just under 90p as I put pen to paper, making UK plc most competitive and German goods expensive. Happy days!