Page 8 - ISQ UK_October 2017

INVESTMENT STRATEGY QUARTERLY

“ In short, it would appear the bark of negotiating
politicians is worse than their bite. ”

elections that are due to be held between 23 and 26 May. It is 2019: IT’S ALL ABOUT BELIEF
highly likely that in these elections so-called populist parties will Europe’s biggest issue in 2019 is belief. Investors struggle to see a
make significant gains, though they will still be short of a way through. The perception remains that both the ECB and
pan-European majority (in contrast to more centrist, incumbent incumbent governments are out of ideas. However, dig a little
political parties). Most populist parties inevitably focus on more below the surface and Europe is not without hope. Mix in a
local and national issues (as seen in recent months in Italy), pragmatic Brexit deal, avoiding trade tensions, new TLTROs,
meaning pan-European coordination between populist parties is addressing some of the populists’ more pressing concerns, and a
likely to remain low. However, the collective threat is real, as it has bit more fiscal spending, there just might be a recipe for success.
the potential to undermine efforts to forge pan-European Given the general levels of global investor pessimism and lower
legislation. than-average valuations, Europe may prove to have more
This would appear to spell disaster for the EU. How can Europe potential than we think.
get more competitive or dynamic if its ability to pass Drawing it all together, I think Teddy Roosevelt’s quote puts it
pan-European legislation is being challenged by a greater focus rather well concerning the outlook for European financial markets
on more populist concerns? And this can be doubly dangerous if a in 2019. For investors and regional economic actors alike, it is all
country – as infamously is the case in Italy – has material debt about belief.
levels that encourage economic sclerosis and credit downgrades.
This could, in certain circumstances, increase pressure to leave
the European Union. The better news for Europe is that in today’s KEY TAKEAWAYS:
financially-interrelated world, policies launched by populist • When investing internationally, emerging markets
parties that do obtain power in specific countries struggle to get have stolen the spotlight as of late. In short, their scope
traction. We have seen historically in Greece and more recently in for population growth and urbanisation provide them
Italy (which had to give in to demands to curtail its ballooning the most potential to “catch up” to their wealthier
fiscal deficit), bond markets are often remarkably effective in developed counterparts.
battering governments into submission. It is always easier to talk • The biggest impact on much of northern Europe’s
than govern. economic growth rates in 2019 rests on broader

And a populist approach focusing on local and national issues concerns. A pragmatic Brexit outcome would be a
that resonate with voters is possibly not all bad. As seen recently boost for everyone given the high levels of trade
in France, Germany and the UK, incumbent governments might between the European Union and the United
very well adopt initiatives to quell such populist concerns. In this Kingdom. Ultimately, I consider this a likely outcome.
sense, Italy will be a fascinating political experiment in 2019. We • Do not be too worried about the populists. Their rising
will see how an instinctively populist government fuses their popularity may just be the nudge more conventional
policy platforms with a need to remain fiscally prudent and politicians need to really step up and inspire.
market friendly. With current low expectations there could be
surprises. If so, this would change European politics for the better. • Europe’s biggest issue in 2019 is belief. Investors
struggle to see a way through. The perception remains
Given the past decade’s poor economic growth, a bit of change that both the ECB and incumbent governments are
can at least offer some different opportunities. So do not be too out of ideas. However, dig a little below the surface
worried about the populists. Their rising popularity may just be and Europe is not without hope.
the nudge that more conventional politicians need to really step
up and inspire.

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