The European Central Bank (ECB) is not expected to change monetary policy on Thursday, but investors are optimistic a Christine Lagarde-inspired fiscal spend and bright spots in the bloc’s technology sector will boost its investment appeal in the year ahead.
Lagarde (pictured) has already addressed the need for the bank to focus on fiscal spending across the bloc. Speaking in September ahead of taking the ECB president role from Mario Draghi, she urged Europe’s governments to co-operate more closely on fiscal policy, saying central banks were “not the only game in town”.
While it is early days, initial signs from Lagarde’s tenure have been positively received. At the bank’s December meeting, Lagarde’s first in charge, the ECB was more optimistic noting downside risks were less pronounced, despite growth expected to remain muted.
But for fund buyers Europe remains unloved as stagnant growth, disinflationary pressures, ineffective monetary policy and plummeting bond yields have led to it acquiring the ‘Japanification’ label. The UK set to leave the bloc by the end of the year only adds to its woes.
But some are seeing Europe as a contrarian play on the back of positive economic signals coming out of China, a key market for European exporters, and foresee the impending growth of Europe’s tech industry, fuelled by venture capital, as a positive sign.
Europe is not Japan
Speaking at a media briefing on Monday, Quintet, formerly KBL European Private Bankers, group chief investment officer Bill Street admitted Europe has significant structural problems, but he views it as a diverse trading bloc and very different to Japan which suffers from an ageing population.
“You can’t just compartmentalise it with a trading bloc such as Japan,” he said. “It is multiple countries, it’s got freedom of movement of labour which allows for flexibility on the demographics. It is a challenge where you have monetary policy and fiscal policy not aligned, but what we are seeing is that the economies are moving at different paces and we do see that there will be pockets of opportunity in Europe.”
The caveat to this however is the UK’s departure from the union because of its importance as a trading partner. Alluding to Lagarde’s previous point, Street says Europe will have to get its fiscal house in order if it is to recover.
“Europe will not be the athlete it could be unless [it] decides to come to the table with a fiscal policy that unites with its monetary policy. Until it does that, you’re going to have huge disparities between the different countries in terms of growth rates, employment and productivity. Personally, I think we are quite some distance away from that.”
Street is optimistic Lagarde will bring the fiscal debate back to the table in 2020 and beyond. “We do believe this fiscal agenda is going to rise quite soon,” he added.
France and Germany to lead Europe’s digital revolution
Street sees good news in France where labour market reforms and government support for start-ups have aided a fall in unemployment. In fact, the number of tech start-ups in France is at its highest level for a decade, claims Street, which provides a stark contrast to the common perception of the country as “old Europe, industrial Europe”.
“We are seeing the green shoots of some of the labour reforms in France. It’s very early days, but I think that, combined with a lot of fiscal support in terms of start-ups, we’re seeing a lot of tech hubs coming out of France.”
In addition, Street sees Europe’s struggling powerhouse Germany as leading Europe’s digital technology and fintech charge on the back of significant venture capital funding. He also thinks Germany will play a leading role in the driverless car revolution across Europe as Volkswagen competes with the US and China. Tesla’s plan to open its first European factory near Berlin illustrates this, he argues.
“We’re seeing huge attraction of venture capital funding in Germany, especially in this digital space. Transport is a classic part of that narrative… and driverless cars, electrification all require this merger of physical and digital technology.
“We are seeing some of the big automotive firms in Germany taking the lead on this. They have the financial spending power, they can buy start-ups and fintechs or technology companies to help drive that evolution. Germany may be an interesting place to follow.”
Coutts goes contrarian with Europe position
Coutts increased its Europe exposure in the autumn of last year on the back of an upswing in the Chinese lead indicator which senior multi-asset manager Jeremy Ward argues can provide a clue as to the direction Europe is taking.
To express this, the Coutts multi-asset portfolios have passive exposure to a Europe ex UK ex Switzerland exchange-traded product, the UBS ETF – MSCI EMU Ucits ETF, which is GBP hedged to increase sterling exposure.
“The nature of the trade is to try and get unloved, cyclical companies,” says Ward. “The Swiss markets contain the Nestlés of this world and pharmas on high multiples. We’re not trying to get those companies.”
Europe just doesn’t provide opportunities
But not everyone is as optimistic on Europe. Psigma Investment Management has undergone a big shift in sentiment towards Europe from 2012 when optimism led it to put a lot of money in European financial bonds and asset-backed securities.
“I just don’t see the same opportunities in Europe now that I saw back then,” said chief investment officer Tom Becket at a media briefing on Tuesday. “Yes, there’s a big difference between the value and growth valuations but ultimately, I think you only invest in Europe as a window on the world rather than necessarily on the domestic European economy.”
Becket rather prefers Japan equities, emerging market equities, the UK, areas of value markets and pockets of credit markets.
“Europe, which was number one ranked in terms of our investment focus in 2012/13, now barely features in the top 10,” he said.
Psigma head of investment strategy Rory McPherson said there is a perception Europe is cheap but once banks and financials are stripped out, there is not a lot of value to be found. He also argues, contrary to KBL, it doesn’t offer much in the way of tech either.
“Actually, the market, once you’ve made that adjustment, looks quite expensive compared with places like UK and Japan and then you throw in how sensitive it is to trade in China. With that not necessarily being solved, there are better places that we can own.”
