Investment Strategy:  First Quarter 2020 – Specific Market Reviews: Europe

  • ‘Some people are on the pitch. They think it’s all over… it isn’t’ though. My reworking of the most famous piece of football commentary of all time (or is it Aguerooooooo, discuss) is my typically puerile way of drawing attention to the recovery, albeit very tepid, of the German economy. The last rites on the Teutonic economic miracle were being read with 110% of pundits forecasting recession but it managed to dredge up 0.1% GDP growth in Q3 last year. As such a big exporter, Germany will be an obvious beneficiary of any thawing in the trade war whilst improved clarity on Brexit should also be a positive. 
  • Eurozone growth was 0.2% q/q for Q3 2019, sluggish and sub-trend but nevertheless better than forecast. Looking ahead, growth is forecast to be around 1.1% this year, an upgrade on previous forecasts given the (for now) rosier view on the trade war. Inflation is around the 1% level and, as for the last decade, the eurozone limps along under in the shadow of deflation and stagnation. 
  • We have a new man, or rather woman (or should I be gender neutral, never sure these days) at the helm of the ECB as Mario drives off into the sunset for a life on the lucrative conference speaker circuit. In truth, he played a good hand with poor cards and deserves a happy retirement. The new boss is Christine Lagarde, ex-head of the IMF, who is expected to follow a ‘more of the same’ policy with a very, very supportive monetary policy. Lagarde is expected to use all her much heralded political wiles to strongly push governments, especially Germany with its big fiscal surplus, for fiscal support. Good luck with that! As long as labour markets remain resilient Berlin will turn a deaf ear to Lagarde.
  • Whilst the financial markets always respond well to the promise of even more liquidity, it’s a moot point as to whether this will actually make any difference to the Eurozone economy. The problem is more structural in that the products that have been the core of the Eurozone’s exports are becoming obsolete, especially as China is moving towards domestic suppliers and a more consumer-focussed economy. Europe has traditionally had a state-supported industrial policy with ‘national champions’ in autos and heavy industry and it is likely that the fiscal support, if it ever arrives, will be channelled instead into a new ‘green deal’ with investment in new energy, healthcare and other sustainable and environmental fields. As for other much needed structural reforms like fiscal integration and banking union, don’t hold your breath. What doesn’t help is that many national governments have problems of their own; German has to cope post-Merkel, France is worried that the yellow vests will be back on the streets, Italy’s new coalition is fragile and Spain has a general election every two minutes. Hardly a solid base to think selflessly about the greater good. 
  • European markets joined in the global equity party last year with most bourses producing a double-digit return for the year. The MSCI Europe is now trading on a forward P/E of nearly 15x which feels pretty pricey.

Summary: Equity markets produced strong returns last year but this was more part of the global trend than anything particularly noteworthy about the Eurozone. Fundamentals remain challenging as growth flirts with recession and earnings estimates falter whilst valuations are starting to look pricey.

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