InFocus: Global Macro 2.0

Why there are green shoots of hope in Europe

Why there are green shoots of hope in Europe

To say Europe has a dark cloud hovering over it right now would be an understatement. Even aside from the Brexit saga, there are economic concerns around manufacturing, change at the helm of the ECB and the rise of populist rhetoric and politics.

In the second part of his interview with WP, David Kletz, portfolio manager and VP at Forstrong Global, acknowledged the less-than-ideal environment the continent is experiencing right now, with the new UK Prime Minister Boris Johnson’s seemingly do-or-die approach to EU negotiations dominating headlines.

However, Kletz believes that while the consensus is to be underweight Europe, there are reasons for optimism.

He said: “The important think to consider is that it’s a pretty big black cloud and it’s really been priced into the market. But we find ourselves asking, with Europe a consensus underweight among investors and valuation seemingly quite attractive because of this skepticism, what could go right? And there are a few things.

“As [Mario] Draghi transitions toward the end of his term [as president of the European Central Bank], he’s leaning towards stimulus and the thing that could really help would be if the ECB were to formulate a plan to have tiered deposit rates.

“We have negative rate policy right now in Europe, which is really killing the banks, especially the northern banks who have about $1.5 trillion excess reserves in Euros that they are paying negative interest rates on.”

Kletz added that a 0% or positive rate would boost a struggling financial sector and, with the expected appointment of Christine Lagarde as Draghi’s successor, a helpfully smooth transition also looks likely.

While manufacturing is teetering on the brink of a recession, non-manufacturing is another green shoot for investors.

Kletz said: “Europe is more trade exposed than the US but there is a massive domestic demand-oriented economy that has been holding up well. We have consumer loan growth that is improving and growing, and we also have low unemployment rates. If you separate out leading indicators, the manufacturing has held up much better.

“If you have some areas of positives to focus on that the market might be missing, it’s set up really good ground to have a potential re-rating of European assets if, under certain conditions, we were able to avoid the black clouds and capitalise on green shoots from elsewhere.”

Chinese inflation policy will be key to investors timing wise and how it spills over to the global economy, while Kletz expects the negative data in Europe to really stabilise in the second half of the year. However, he remains wary of dangers going forward, like a hard Brexit, a Donald Trump tariff attack on the European auto sector and an escalation of the US-China dispute.

He added: “But weighing everything up, in terms of how things are priced, it does make sense to be a little more optimistic than the consensus in European assets.”

 

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Founded in 2001, Forstrong Global Asset Management Inc. manages money on behalf of individuals, financial professionals and institutions. Our multi-asset global macro thematic approach has demonstrated the ability to safely steward client assets through challenging markets and economic environments. Forstrong is part of the Industrial Alliance Insurance and Financial Services Inc. (TSE: IAG) family of wealth management companies, which together serve over $100B in client assets.