New Statesman

Subscribe
from just £1 per issue
New Statesman Podcast
Show Hide image

Promoted by Janus Henderson

Business
26 June 2017

Europe: as the politics subside

How long can a resurgence of investor interest in Europe last?

Might Europe be the place to be?

I think European equities tick a lot of the right boxes right now. Economies are recovering – indeed the first quarter of 2017 saw Europe once more grow faster than the US, having outpaced the world’s largest economy in 2016. Valuations are not excessive, either relative to the region’s history or the US equity market. Like almost anything, I believe European equities also look compelling relative to bonds. The final part of the jigsaw puzzle might have been earnings growth, but here too Europe is, at last, getting close to achieving a gold star.

Most of this has been known for quite a few months now and is part of the explanation for the better performance of Europe year to date. Even the euro has strengthened against the US dollar, from about $1.05 at the start of 2017 to $1.12 at the time of writing. Politics looks more settled, after the surprises of the Brexit vote last year in the UK and the election of Donald Trump in the US Presidential election. Perhaps a comment I made at the beginning of 2017, that “by the end of 2017 the UK and the US might look to have been the exceptions” when it comes to successful populist votes, seems more prescient.

Now that the political backdrop is perhaps more settled, with the UK’s potentially tragic Brexit decision an exception, how long can a resurgence of interest in Europe last? One threat is the gradual move towards ‘tapering’ by the European Central Bank (ECB) of its unprecedented quantitative easing program, and the support this provides economies by injecting cash to drive down the cost of borrowing and increase consumer and business spending. But it is already clear that this will be a very slow process. The economic recovery in Europe remains quite slow and inflation, outside the UK, is well below the ECB’s target of ‘below or close to’ 2%. At the same time, the damaging effect of negative interest rates needs to be avoided.

 

What could derail this market?

The one exception to what looks to be a relatively rosy scenario, in my view, remains the UK. The Brexit ball is rolling onwards, following the invocation of the now infamous Article 50, but the calling of a General Election was another distraction. The UK is still no closer to knowing what sort of Brexit is desirable, or more likely, economically feasible. Once the reality of debt, demographics and a weak currency become clear, I suspect that the UK market will continue to struggle against other European peers.

Elsewhere in Europe, economies look well set, and I suspect that more capital spending and investment are likely to be incentivised with tax cuts in Europe, again outside the UK. In this scenario, those capital investment-related names such as Siemens, Legrand and Atlas Copco should continue to do well. Luxury names, and auto makers, many of which have rallied hard so far in 2017, are likely to struggle due to subdued consumer demand. Financials have also seen mixed performance so far, with insurance underperforming banks. This seems an anomaly given the paramount importance of long-term savings to cater for retirement.

It would be entirely healthy for European markets to drift through what will hopefully be a quiet summer, without shocks such as Brexit to contend with. I think all seems well set though for European markets to trade higher than current levels by the end of 2017.

Before investing in an investment trust referred to in this document, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment. Issued in the UK by Henderson Investment Funds Limited (reg. no. 2678531), incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE, is authorised and regulated by the Financial Conduct Authority to provide investment products and services.

More

Related articles

Photo: Getty
Show Hide image
Asia
6 July 2017

Could China be the new best friend for a post-Brexit Britain?

The G20 meeting this week offers Theresa May - and Labour - the chance to think about how to get the most out of closer ties to the Chinese.

China’s vigorous growth has lent itself to magical thinking, but for a beleaguered Theresa May heading into G20 negotiations, a realistic understanding of what role Chinese investment may play in a post-Brexit Britain should be a top priority.

It may be implausible that Britain can really become Singapore West, not least due to Tory policies of austerity, but the UK’s orientation towards service industries makes it remarkably well placed to engage with Chinese needs.

Under the status quo, however, this would only further entrench the divide between London and the rest of Britain. And if May cannot, or will not, think these difficult questions through, then Jeremy Corbyn’s Labour party could help steer the country into a new configuration without abandoning the areas outside of the M25, or the UK’s most distinctively positive contributions to global culture: political liberalism, judicial independence, and all that comes with it.

It may seem that between a solitary Britain and the Chinese behemoth, China holds all the cards, but that depends very much on whether the cards in play are industrial capacity or size, or whether they play to the UK’s strengths: creative industries, education, a strong real estate market, human capital, institutions with a high degree of global trust, and a society whose value system continues to attract wide admiration among Chinese citizens.

It’s often observed that today, we live in an information economy; for greater London, arguably the largest cluster of cosmopolitanized artists, educators, and architects, that’s good news. The post-industrial areas of the UK which voted for Brexit may find it difficult to compete with a newly inward-looking China which in any case is quite capable of operating factories at home, but the world-class museums of London remain inspiring models for China. Even as tourists make a beeline to them when they visit London, there’s a real role for these institutions in advising China’s own museums. Just take a look at Shanghai’s Power Station of Art, a contemporary art museum managed for the public in an abandoned power station (sound familiar?) or Shenzhen’s Shekou Design Museum, which has collaborated with the Victoria and Albert in devising its curatorial scheme, to realize the truth of this.

Britain’s education system, which already attracts tens of thousands of fee-paying Chinese students, will continue to be competitive regardless of the politics of the Eurozone. Chinese cities are dotted with works either created by or derivative of British architects, from the late Dame Zaha Hadid to Thomas Heatherwick. To an extent, the UK may benefit from a somewhat obsolete common perception within China of Cool Britannia. In China, Oasis’ “Wonderwall” is still to be found in every karaoke, Benedict Cumberbatch is a gay icon, and Harry Potter has helped to shore up a somewhat anachronistic and twee image of the UK which more or less directly draws Chinese students to UK universities. London will remain the capital of European culture, Brexit or not. Needless to say, the more that these universities, museums and architecture firms are able to attract global talent, the more they will be capable of remaining globally competitive.

The verdict for the Brexit regions is slightly more grim. In an era in which Chinese investment is increasingly inward looking, and moreover in which Britain no longer has a privileged access to the common market, don’t expect Huawei’s 1,100 British employees to increase enough to pick up the slack - even if they were to be able to pass muster with regulators, which as the Hinkley Point plant case shows, might be a tough sell. What’s more, British world champions may increasingly find it appealing to build up their operations in Asia - whether that’s the University of Nottingham in Ningbo’s campus or the Victoria and Albert museum’s collaboration with Shenzhen, or Lisson Gallery’s work in bringing British artists to China.

Again, fair enough and nice to see, but it’s far from clear how this might benefit the post-industrial Britain from which the Brexit vote emanated. If anything, it seems that Brexit, rather than making for a more cohesive society, could lead to a deregulated and increasingly globalized society, in which British brain drain, as in the 60s, once again becomes common. The answer might be to look into the British service economy, now accounting for 80 per cent of the total, and eviscerate the class differences between financial services or legal services with the services of, for example, an employee of Pret-a-Manger. For Britain, the service economy is the future, but to say that without exploring the internal differentiations within that economy is to foreclose upon extremely important questions.

The City stands to lose out a great deal from Brexit, but if it manages to become the site of the RMB’s internationalization- a role that, for different reasons, Hong Kong and New York both stand slightly more equivocally towards - then it could discover the impetus for a new, post-Brexit role, as Chinese capital continues to flow into former Commonwealth countries such as Pakistan and South Africa. Whatever its merits may be, China’s closed and internally contradictory legal and economic system do not sync up readily with those of the English speaking world. It is in this respect that the City could redefine itself, in the process forcing (or imparting, if you prefer) greater transparency on the Chinese investors - a transparency that will only come if the British government insists upon it.

China chose London as the first sovereign RMB bond issuing center outside of China during May 2016, the RMB can be used in IMF loans. The implications of the RMB becoming a global reserve currency on par with the dollar are vast; its also rather unlikely, at least in the short term. If it must happen anyway, though, the City could show its real value - redeeming itself, so to speak - not by money laundering, but by imposing rhyme and reason on China’s hopelessly chaotic wild West of half-reformed state owned enterprises and murky strings of shell companies and political rivalries, helping these companies and, indeed, state enterprises - banks included - to become responsible, transparent, and competent, in an era in which they seem inevitably poised to take ever greater significance.

Whither Labour?

Martin Jacques, once Corbyn’s comrade as editor at Marxism Today, has become one of China’s most unrealistic apologists. No less than Theresa May, as Corbyn’s Labour seeks to become a plausible party of governance, it must define a social democratic way to collaborate with the Chinese Communists - even if, as Chris Patten observed, they may find socialism a rather dicey proposition. Britain must not become a dump for mediocre Chinese oligarchic projects such as Dalian Wanda’s Vauxhall Nine Elms, for money laundering in the City, for continuing real estate speculation - but China has so much more to offer, above all the optimistic human capital of its younger generation.

Defining a Britain oriented towards intellectual work in an information economy, an objective in which it is substantially ahead of the curve, could allow Britain to provide China with a viable roadmap. It’s unlikely that Chinese will be using cigarette lighters made in Britain anytime soon - and unclear whether that would even be a good outcome, in any case - but it’s entirely possible that Britain’s world class cultural, legal, and educational institutions could help China become the transparent, modernized, humanistic nation that it has the potential to be.

More

Related articles

0800 7318496