INSIGHTS

Duncan Donald

Thu, Jul 23


As the Eurogroup agrees an aid package. Does the investment world start to consider its underinveste

Over the last 12 years the Eurozone has come under enormous pressure. This kickstarted after the financial crisis whereby the collaborative group came under the unenvied test of finding one solution to meet the needs of all countries within the group. This is no easy task as countries naturally have their own needs to deal with. Some needed more stimulus, some less, those who needed the least didn’t want to put their hand in their pocket, funding those who they perceived to be less economically frugal.

 

Therein lies the problem of a collaboration of nations, at times the freedom of movement, unified trade deals and financial power will work in favor, but when things turn tough the in fighting begins.  Because of this, the Eurozone was slower to emerge from the crisis. Even the superpower of manufacturing and industry, Germany struggled to overcome these pressures.  This scared investment out of the bloc as investors awaited a significant turn to the upside.

 

The internal pressures, commitment and constraints of the European Union is what brough the voters of the UK to vote to leave the EU, which remains on course to occur by the end of 2020. Whether that elects to be the right or wrong decision remained to be seen at the start of the year, but since the emergence of Covid-19 the strength of the UK to deal with no trade agreement and WTO terms is certainly a concern, should it transpire.

 

But for the Eurozone, in the strangest of ways, the handling of the pandemic effects could prove to be the turning point in the investment communities believe in the collective bloc again. Being one of the first areas in the western world hit by the virus, Central Europe was quick to lock down its citizens, businesses, and borders.  The immediate shockwaves of this drastic action bore pain on the Euro and European Markets. Lockdown was maintained for a prolonged period, and so far, the results of this seem to have been successful in comparison to the US and UK. Whilst as we know with Covid-19 nothing can be a given, but the signs are certainly strong for a good recovery.

 

From a financial aid and stimulus perspective, we were faced with another financial crisisesque scenario, whereby a collective solution was required for a situation that hit and effected more countries than others. Over the last month speculation had been gathering about the bloc’s ability to find agreement. However, earlier this week the EU agreed a 750 billion recovery plan via 360 billion of low interest rate loans and 390 billion of grants. This was a huge step forward and heralded as one of the most important steps since the inception of the Euro by French President Macron.

 

So, whilst this weeks headlines focuses on Europe’s positive handling of the pandemic and ability to find mutual agreement in the rescue package, the Euro currency saw a relief rally. The question is will that just be a flash in the pan before a downward correction?

 

As stated, the Euro hasn’t been the holding of choice for reserve currency holders investors and funds, so perhaps we now have a reason for portfolio shifts which could raise the value, over not just a few days but a significant period.  With the US and Trump looking to have underestimated the impacts of the virus and him being hellbent at inflating the equity market to create a USP for his ailing election campaign there are concerns in the US. There is also concerns over the tax implications should we see a Democrat President. The UK remains part cocooned and only just emerging from the homeward safety of lockdown.  These factors could see a shift out of the US and UK and even bring investment back towards the Emerging Markets.

 

Considering the above factors, we are seeing investor, business and consumer confidence coming back towards Europe.  A perfect example of this is the German stock market (DAX) which has this week finally recouped the losses brought by the pandemic. Obviously in the US we have already seen all major indices already achieve this feat, BUT it must be considered that the US markets are enormously dominated by a handful of companies and the performance of the collective indices is dragged up by the few, whereas the German Dax has a greater balance of sectorial and equivalent business size contributors, making its “V shaped” recovery perhaps more admirable and reflective of the economy as a whole.  

 

Considering the above there could well be a strong case for appreciation of the Euro and European Business, Commercial and Private Property Sectors as we come through the worst of the virus and past the US elections. The early indicators are perhaps already there to be seen.


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