Submitted by Bill Blain of Mint Partners
Sloppy Markets, but a new investment thesis: buy Macron's Europe?
“Roll up that map, it will not be wanted these 50 years.…”
Its been a “sloppy” week in markets. Although the US stock market looks cosmetically strong, it’s largely on the back of Tech and Fangs – its not broadly spread. European markets are still languishing. Credit markets don’t feel they are going anywhere – it feels like they are already closed for the Easter Break. New deals have been underperforming, there’s a distinct sogginess in HY and Financials particularly.
I’ve attached a chart from our HY bond team showing the divergence between HY and Stock Sentiment this year – that is worth considering.
Why the lacklustre performance? Its not just the comings, but mainly goings, at the White House, Trump wanting a trade war (actually he doesn’t), or the Russians, or the host of other things.. It’s just that markets are suffering a distinct lack of empathy at the moment. No one feels particularly inclined to do anything… and if the whole market is sitting on its hands waiting… then I suspect we’ll be waiting a while longer..
Meanwhile, its Friday, so traditionally I go off on a rant about something outrageously stupid and downright daft.
How about this one as an investment thesis for the next few years: “Invest in Europe – Post Brexit it might just Work!”
My first clue to this apparently hatstand investment thesis is Angela Merkel in Paris today to “celebrate” her fourth term in office with her French counterpart. Interesting…. the first thing the German Chancellor does in office is to fly to the side of the new Emperor of Europe.
My second input is my own opinion that we Brits are terrible Europeans. We don’t dance to the same tunes. We simply don’t have a common history with the continent – in fact we’re the literally other side of the story when it comes to the last 1000 years. While we obeyed all the Common Market and EU rules, and played the game according to the rules we’d read, we never saw Europe or understood it from the same perspectives as Core Europe. By trying to play a game the rules of which we couldn’t possibly understand, Britain became a break on further advancing the European cause.
With the UK out of the equation, core Europe can get on with the long-term project. They are more likely to succeed without us. Cynics might suggest the “long-term project” hasn’t changed over the past 500 years – the goal is German or French hegemony over the continent. On the other hand, a stronger Europe can’t be a bad thing in terms of global opportunities – can it?
With Weidmann looking increasingly unlikely to ascend to the ECB throne when Draghi retires, some think its worth gaming through scenarios on the likely alternatives. While ECB Chair is a critical position – and without Draghi’s deft handling of the Eurozone crisis over the last 8 years I doubt the project would have survived - it doesn’t actually matter who gets the job.
What’s more important is going to be the agenda for the ECB going forward – and it’s being set from Macron’s desk in the Elysee Palace. Sooner than we think we’re likely to see a coordinated ECB and closer Union approach to Europe – driven by Macro and Micro fiscal policy and closer Union to ensure growth deliverables. European ministers and budgets may infuriate the Brexiteers as clear evidence of the pernicious power grab of European Bureaucrats, but its going to happen.
We’ve all seen what’s been occurring in Berlin – a desperate marriage of convenience between the Centre Left and Centre Right that will leave both squirming for relevance among their core supporters as each trades away core principals. They may have power – at the cost of fuelling a long term surge in Extreme Right. Germany remains the economic powerhouse of Europe, but I suspect its going to be politically muted in the new Europe.
That gives Macron the time and opportunity to push his ideas and agenda to the responsive SFP. Merkel is taking her new finance minister Olaf Scholz to the Paris festivities. Macron will get a positive response from Scholtz when he proposes a single European Finance Minister, a massive investment boost and a host of other macro and micro initiatives – Merkel has little choice to accept. If she objects, the Grand German coalition is likely to fall apart.
The policy mix Macron and his cronies propose for Europe are wide ranging, and typically French. However, a solid mix of macro and micro fiscal policies plus clear direction and investment should work. Macron is not only in the driving seat, but he’s got a map that may just lead to the right place…
However, it might be worth considering why the last European experiment to achieve a unified European economy failed. I’m thinking of the 1800s when the “Continental System” Napoleon enforced across Europe failed. It failed because everyone wanted to trade with the UK. Even Napoleon’s own brothers (whom he’d elevated to European thrones) were dealing with pernicious Albion behind his back!
It might be a lesson for Modern Europe to consider as they factor in the post Brexit relationship with the UK. (OK – in 1807 the UK was a far more significant global economic power than today – but we still buy more German cars than anyone else!)