Investment leaders on Europe: There's room for optimism

Europe has undergone a period of intense political change and volatility, bringing with it a period of real uncertainty and shifting tectonic plates of populism.

Against this backdrop, where do the opportunities lie for investment managers?

Kicking off with the macro perspective, Mike O'Brien, CEO, EMEA at J.P. Morgan Asset Management, told FundForum that it was hard not to be optimistic about global growth prospects.

The threat of inflation had subsided, he said, albeit not entirely:

“We will see inflation, but it’s subdued, it’s slow. Long term what we are seeing is trend growth. But it’s taken eight years to get here.”

Martin Lück, Chief Investment Strategist for Germany, Austria & Eastern Europe at BlackRock agreed, adding that concerns of a China slowdown were unfounded – at least in the short term.

“The Chinese can’t afford a sharp slowdown,” he said. “They will continue to contribute positively to global growth in the immediate future.”

Joseph Little, Chief Global Strategist at HSBC Global Asset Management commented that, while fears of trade wars had diminished, it was difficult to predict, at least with any confidence, whether the US was going to push ahead with a broader economic reflation.

“We’ve seen the end of fiscal austerity across major advanced economies, so much so that the IMF is now telling us that governments are going to support growth this year. That’s an unusual state of affairs relative to what we have experienced in the recent past,” he stated.

Europe

With the ECB recently revising forecasts upwards, the panellists broadly agreed that there was reason to be optimistic about Europe – but with reservations.

For instance, Martin warned that, although it was a positive environment, the Euro crisis wasn’t over yet.

“We are still in repair mode,” he said.

There were issues around excessive debt, remnants of the banking crisis, and competitiveness across the Eurozone to deal with, he said.

But it was a benign scenario if you compared it to the last couple of years, he said, adding that it was a good time for reforms.

Political risk

With the recent French election, it would be easy to assume that we had reached peak populism. But there were still political risks to be reckoned with, argued Mike.

“I do worry that if Macron fails we will get serious issues. A centrist government not delivering on its promises would risk reviving populism,” he thought.

On Brexit, Joe felt that, whilst it was tempting to assume, thanks to the recent election, that we would now have a softer Brexit, a hard one was not off the table yet.

“My sense is that it’s hard to read too much into this, we can’t rule out a hard Brexit. We have to think of multiple scenarios as ways forward.

“What’s realistic to me is that that 12 to 18 months down the line the negotiations are carrying on and we haven’t made that much progress.”

From a European perspective, Martin said that the 27 would not accept a positive deal for the UK. In fact, their position had hardened, he said.

The negotiations would drag on, and investors should brace themselves for lots of volatility as a result.

“Let’s not forget that there is only one year to negotiate. I see very little chances of avoiding a cliffhanger solution, which eventually will lead to a transition period of five or six years where Britain is close to the EU but outside officially.

Markets

The panel ended the session by discussing some of their preferred strategies.

We were in an environment where growth looked good, and one that clearly favoured equities over safety assets such as global government bonds, said Joe.

“The rewards for investors are still available in volatile asset classes,” he explained. “Parts of the equity market: Japan, Asia, Europe to some degree, and parts of emerging markets; both in the local currency debt space and in the equities space.

“The relative rewards could be found in these risky assets,” he said, adding that it was less about extreme valuation, and more about macro momentum trends.

Mike stated that, among global equities markets, Europe would be top of his list.

This was down to the operational leverage that European companies had, the subdued inflationary environment, and economic growth.

Martin felt that, whilst Spanish and German equity markets had done well, there was also France to consider.

“If Macron puts reforms in place in a credible form, France would be one of the markets that could perform best in the second half of 2017,” he said.

But it also depended on whether the global reflation trend continued, and the ability of other economies to continue to grow.