FLEE - Europe: Big Changes Coming Good Time To Diversify One's Portfolio

2024-01-17 22:19:11 ET

Summary

• Europe managed to avoid an energy crisis despite the Ukraine war, with inflation under control and interest rates peaking.
• The European Central Bank is expected to lead interest rate cuts, followed by the Bank of England and Scandinavian central banks.
• European politics experiencing a wave of conservatism, with traditional parties facing pressure from new or rejuvenated conservative parties.

The energy crisis everyone was expecting in Europe at the outbreak of the Ukraine war did not materialize. The Old Continent managed to muddle through. Inflation is under control and interest rates seem to have peaked.

In the year ahead, we expect two major events in Europe, one monetary and the other political. Both will greatly affect stock valuations.

On the monetary side, we believe the European Central Bank will lead off the coming cycle of interest rate cuts around the world. The Bank of England will likely follow with some delay, as will the Scandinavian central banks. At this stage, that seems the most probable scenario.

In politics, Europe is on tsunami watch. The traditional parties, from the Dutch Liberals to the German Social Democrats or President Macron’s Renaissance Party, are all feeling pressure from new or rejuvenated conservative parties. Regional elections in Germany and national elections in Italy and the Netherlands have all seen a rejection of politics as usual in favor of parties that were formerly considered unacceptable.

Polls suggest that the May elections for European Parliament will see this movement accelerate. A tidal wave could drown most of the existing political establishment in favor of a new generation. French president Macron understands this. That’s why he appointed a new 34-year-old Prime Minister to try to break this wave.

The rising conservative movements in European countries share a common desire for a more pragmatic approach to today’s challenges. They don’t so much oppose existing policy goals as they try to manage them better. European citizens overwhelmingly believe in global warming but are fed up with the draconian regulations in place to combat it. The outgoing Dutch government’s plan to cut nitrogen emissions by shutting down big farms and reducing livestock herds by 50% is a case in point. How are these farmers supposed to make a living? What are Dutch people supposed to eat?

Most Europeans similarly do not reject the Europe Union, but they are tired of the endless stream of suffocating regulations coming from Brussels. Even immigration has become a hot topic mostly because it is perceived to be out of control. Many immigration policies are no longer just compassionate. They have become unaffordable. For example, reading the political tea leaves, President Macron asked his former Prime Minister to water down a long-existing law that gave every person on French soil, legally or not, full health benefits.

The new Continental conservatives are also taking a more pragmatic approach to business and social issues. Europeans are still very attached to their social programs, but seem to think that things went a bit too far. The mood is for a little less equality and a bit more meritocracy. This should translate into fewer constraints on businesses, including lower fiscal pressure, which could turn out to be very good for growth and profitability.

Big changes are coming to Europe at a time when its stock market is trading at a historic discount relative to US equities.

Now is a good time to diversify one's portfolio.

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