Page 8 - ISQ UK_October 2017

INVESTMENT STRATEGY QUARTERLY

of TARGET 2 is inconceivable, but beneath the surface, some Whilst 2022 will surely throw up some specific opportunities,
national central banks have mounting liabilities. The regional both at the sector and individual stock level, in the round the
central bank bearing the greatest burden is the German Bun- region’s persistent equity market discount to the United States
desbank, now lending well in excess of a trillion euros through appears entirely warranted and its bond markets supported by a
TARGET 2 to those other regional central banks seen to be programme which may have but a limited shelf-life.
exploiting the system. The mounting risk of rapidly accelerating
losses, due in large part to COVID-related lockdowns, is a clear
and present danger. KEY TAKEAWAYS:

• European equities trade at a lower valuation multiple
than do the US, but a discount seems warranted.
“The new Bundesbank President, Herr Joachim • By its actions, the European Central Bank’s (ECB)
Nagel, may have been brought in to address monetary policy settings have evolved to an extent
soaring inflationary pressures, but in reality, that reduces the pressure for urgent structural reform.
he has a much bigger headache to deal with.”
• Persistent negative rates, liquidity injections and
government spending have delivered little obvious
The new Bundesbank President, Herr Joachim Nagel, may have multiplier effect on the real economy.
been brought in to address soaring inflationary pressures, but in • The phased introduction of Basel 4 banking regula-
reality, he has a much bigger headache to deal with. What might tions from Jan 2023 will likely hamper the extension
precipitate a crisis is the likely phased introduction of the delayed of the credit necessary to support the delivery of
suite of Basel 4 regulations from January 2023. Banking sector medium term growth forecasts.
compliance, to ensure resilience, will likely involve reducing risk-
weighted assets. With more than half an eye on these impending
rule changes, the regional banking sector seems unlikely to
provide the general expansion of credit required to support the
Commission (and ECB’s) optimistic growth forecasts.
This analysis conclusion is that the Eurozone is facing a crisis
that may, ultimately, call into question its very existence. Impor-
tantly, the crisis outlined above, differs significantly from that
potentially facing the United States. The latter’s issues derive,
essentially, from the consequences of excessive money printing.
Whilst similar policies have been pursued in the Eurozone, prob-
lems are more structurally deep-seated.

“The cumulative effect of an over-leveraged
banking system and a settlement system
devoted to the concealment of bad debts is
that the region’s economies have become
progressively less efficient.”

The cumulative effect of an over-leveraged banking system and
a settlement system devoted to the concealment of bad debts is
that the region’s economies have become progressively less effi-
cient. The advent of Basel 4, unless it is postponed again, could
prove the trigger for a take-down of the region’s banks, its central
banking network and even the euro itself, ultimately the glue that
holds the entire project together.

8