Page 6 - ISQ UK_October 2017

INVESTMENT STRATEGY QUARTERLY

Europe: I Want to Believe

Chris Bailey, European Strategist, Raymond James Investment Services

When thinking about international investment in recent

months, emerging markets have stolen the spotlight as of “ Believe you can and you're halfway there. ”
late. In short, their scope for population growth and – Theodore Roosevelt

urbanisation provide them the most potential to “catch
up” to their wealthier, developed counterparts. By contrast, Union’s 28 member countries still account for 21.8% of global
Continental Europe (‘Europe’) and Japan have been seen GDP, just behind the United States (24.6%) and ahead of China
1
(14.8%) . Its currency, the euro, accounts for 34% of global
as the less attractive cousins.
2
transactions, second only to the U.S. dollar (45%) . Given that -
even if the UK is excluded - it also holds three G7 seats and four
EUROPE: A HARD SELL G20 seats, Europe still carries significant diplomatic clout.
The case for investing in Europe is difficult to make at face value.
Growth over the past decade has been substantially lower than in QUANTITATIVE EASING: ONLY TAPPING THE BRAKES
the United States or in the United Kingdom. Supranational The key question for global investors is whether Europe is stuck in
organisations, such as the International Monetary Fund (IMF), an insurmountable malaise, making its financial markets largely
have recently reduced their forecasts for European economic unattractive to external investors. In answering this question,
growth. Official interest rates remain negative, per policy that investors might look to certain shifts in monetary policy by the
was put in place following the euro crisis of 2013. Given the European Central Bank (ECB). At the end of last year, the ECB
anaemic growth that has gripped the continent, central bankers stepped away from undertaking new quantitative easing (QE).
have been loath to raise them. Additionally, Europe’s This would seem to indicate an awareness that constant monetary
much-vaunted political stability has been challenged by a rising stimulus is not necessarily desirable (as shown in the case of
tide of populism, most notably in Italy. Unsurprisingly, equity Japan, which has maintained stimulative monetary policy for
valuations, investor confidence, and general levels of dynamism decades). However, this does not mean that the ECB is done with
all remain noticeably lower relative to North American markets. alternative instruments. The ECB announced new targeted longer

However, Europe is not out for the count. It bears mentioning that term refinancing operations (TLTROs) in early March, offering
Europe still matters, despite its current difficulties. The European long-term loans to banks that incentivise them to increase their

5 1 Eurostat, EU in the World, 2016; Society for Worldwide Interbank Financial Telecommunication (SWIFT)
2