?With newspapers full of Trump, Brexit and speculation about European politics – especially the upcoming French elections – it would be understandable if European investors opted to head for the hills.
But US equity indices have continued to hit new highs and the party mood seems to have spilt over into Europe, even though no European politician is offering anything like the Trump agenda of tax cuts, deregulation and protectionism. Why the upbeat mood?
On the face of it, it is not clear why European markets are advancing ahead of elections that could, at best, confirm the shaky status quo and, at worst, threaten the future of the euro. A victory for Marine Le Pen would make Brexit look like a storm in a tea cup, given her stated desire to lead France out of the single currency. With instability in Italy and elections in the Netherlands and Germany, there is more political uncertainty in Europe than at any time since the Greek crisis.
Market pragmatism prevails
But markets are gently optimistic for a number of reasons. At the simplest level, people do not believe the French will vote Marine Le Pen into power in the second round of the French elections. Perhaps that is complacent; there are certainly deep-seated problems in France that politicians have failed to address, but the French appear to be tempted by Macron’s more positive agenda. On a more general note, investors remember that the Eurozone has shown remarkable resilience in previous crises. It has been better to buy than sell during these periods.
Another factor is economics. Slightly more optimistic signals have been coming out of the European economy since the middle of 2016. Construction activity, confidence indicators and unemployment are all heading in the right direction, even if the picture is patchy and some of the moves are tentative. The recovery in the price of oil has also given headline inflation a short-term boost, although underlying inflation remains steady. This boost has removed some of the jitters about the potential risk of deflation as well as encouraged talk of when the European Central Bank (ECB) will start to temper its bond buying scheme. This has provided a more positive backdrop for the banking sector, which has continued to rally since Trump’s arrival, although the progress of European banks has not been as dramatic as those in the US.
Simon Rowe – fund manager – Henderson