DIY Investor Magazine
/
March 2017
36
Tim Stevenson
Director of Global Equities, Henderson Global Investors
EUROPE IN A WORLD OF ‘ALTERNATIVE FACTS’
These are interesting times. Suddenly everything is
different – populism has become protectionism under
the mantra of ‘Make America Great Again’ and Brexit is
set to lead the UK to sunnier climes. A few minor details,
such as the interconnected nature of global supply
chains and the relationships between companies and
regions, are being forgotten for now..
Europe is in many ways now in the eye of the storm.
The UK is stumbling along an undefined and unknown
path towards Brexit, with the government promising no
damage to the economy and full access to European
trade, while not paying any bills. A few nervous
dissenters, quickly shouted down by a partisan, right-
wing press, are quietly asking ‘how?’
Pragmatism still dominates European politics
The political backdrop in Europe outside the UK
continues to make everyone nervous. The Netherlands
will be first to the polls in 2017, and the Far Right party of
Geert Wilders will, like all European ‘alt-right’ parties at
present, probably poll a significant number of votes on
an anti-immigration bill. But Wilders will not be included
in a coalition government when it comes to running
the country. As an aside, if there is a referendum in the
Netherlands, the Dutch have made it quite clear that it
would be advisory only. It is a pity that now ex-Prime
Minister Cameron did not think through the potential
risks of the UK referendum in June 2016. This was a
point made by the Supreme Court in a recent ruling over
how the UK government can start the process to leave
the EU (Article 50).
France faces a key election in April and May, and
there is a growing opinion that, even if Marine Le Pen
of the extreme-right National Front party makes it
through to the second round of voting in May, she will
probably lose out to either François Fillon (Republican)
or Emmanuel Macron (Independent) in a repeat of the
2002 election, when her father lost convincingly to
Jacques Chirac. Autumn sees the German elections,
where it looks like Chancellor Merkel will be re-elected.
Is regional recovery taking hold?
The suggestion is that populism will not overthrow
the European path of ‘boring but reliable’ economic
progress. That may enable investors to look again at
out of favour European markets and the improving trend
in profits. Given that Europe’s gross domestic product
(GDP) is expected to grow by about 1.5% in 2017, and
that an improving economic climate is leading to more
relaxed government spending, there is every reason
to hope that Europe is now in a virtuous, rather than
vicious, circle.
With a combination of better growth and emerging
inflationary pressures (chart 1), yields on 10-year
bonds have risen to over 0.3% in Germany and over
2.3% in the US, as at 8 February 2017. This has major
implications for banks and recovery names. It is clear
that, regardless of intense global political uncertainty,
the market has chosen to believe in the hope of
economic recovery.
Chart 1: Inflationary pressures picking up in euro
area ‘haystacks’, is known as Passive Investing.
Source: Thomson Reuters Datastream, Fathom
Consulting. ‘Headline inflation’ is percentage year-on-
year change in the Euro area, as at 9 February 2017.
The European monetary policy committee (MPC) has a
target of near or below 2% for headline inflation.
It remains to be seen how strong this recovery turns
out to be, or how long it lasts, but it would be wrong to
ignore it. Companies more sensitive to changes in the
