Back to the Deutsche Discotheque
To put it mildly, there’s not been too many positive things to say about Europe recently as war, inflation and political upheaval have weighed on investor sentiment. To quote a US hedge fund manager by the name Dan Loeb, “Markets are like a bad party. When things get too euphoric, it’s time to go home. When everyone is throwing up in the bushes, it’s time to come back.” In September last year we rejoined the party, moving to an overweight Europe allocation in the Overseas Equity fund and just this week, taking a new position in the Fixed Income fund via a European Government Bond ETF.
Spain, Greece and Malta continue to cut shapes on the dancefloor, all posting reasonable GDP growth figures in 2024 but Germany and France, the two largest economies in Europe, still have their heads firmly in the bushes. So, what do we see that makes Europe interesting now?
Sometimes bad news is good news, and good news is bad news.
Eurozone GDP growth has been non-existent for some time, Italy and Germany’s industrial output has been falling and the French are still arguing amongst themselves as to who’s even in charge. Clearly each constituent nation of Europe has their problems. Europe’s silver lining is that they are one of the first developed regions that can say with a degree of confidence that they have inflation largely under control now. What this means is that the European Central Bank has a greater opportunity to cut interest rates than other regions and should we see further ‘bad’ economic news, so long as inflation remains under control, this would be a positive for asset prices as it would further fuel the expectation for interest rate cuts to support growth. For fixed income assets, falling interest rates means falling bond yields, which in turn causes capital values to rise. As a direct consequence of these views, we’ve recently taken a position in a European Government Bond ETF with substantial duration, meaning that the ETF will have a high degree of sensitivity to changes in interest rates. Falling interest rates are also a positive for equities as it means the cost of borrowing falls and lower discount rates are used for valuing future cash flows – a benefit to many alternative and property assets too.
The potential positives for a European revival are if anything more relevant for the ethical portfolios than the core models as they have an inherent bias towards the region, due to the level of ESG related development and attitudes. You may have noticed since the turn of the year, the performance of the two ethical portfolios has significantly improved – European allocations have certainly played a part in this and we are optimistic that this trend will continue.
With a little supportive fiscal antidote, we may well see Germany and France dragging the rest of Europe back up on that dancefloor once again and the BAM portfolios are positioned to benefit from such a scenario.
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