September 10, 2018 / 12:55 PM / a month ago

European populism is not yet an investable theme…

European populism is on the rise, with nationalist and far-right parties making significant electoral gains across the continent. Some have taken office, while others have become viable opposition voices. From France to Slovenia and Sweden, the wave is still rolling - even gaining momentum.

With the rise of populist parties across Europe and increasing nationalist rhetoric – what does the future of Europe look like? Growing anti-globalisation and protectionist sentiments buoyed by the Brexit vote – and in no small part Trump’s presidency – have seen shifts in a general public perception of the EU’s role and power. Host Paul Henley welcomes Dr Huw Macartney, Senior Lecturer in Political Economy, University of Birmingham, and William Hobbs, Barclays' Head of Investment Strategy, to discuss the key issues.

And then, of course, there’s a plethora of other geo-political factors at play that are making things noisy for investors. The looming uncertainty of Brexit, global trade wars and U.S. protectionism - to name but a few. Head of Investment Strategy at Barclays Investment Solutions, Will Hobbs, however, believes that despite this perfect storm, Europe is looking much less disruptive than before.

“For investors, it doesn’t change the signal that we need to listen out for – the lead indicators for economic growth, such as the business confidence surveys. But, it has certainly changed the volume of noise and interference helping to obscure that signal.” He adds, “Populism is not currently an investable theme for us. If you think about what markets really care about, it is the path of corporate profit and interest rates primarily. To get a sense of this path, most of the time we’re still better off focusing on the underlying economy. Yes, the rolling existential crisis endured by the continent for the last decade in particular has been influential here, but looking forward we expect it to be substantially less so.”

While market strategists steer clear from being ‘armchair’ political commentators, the warning to investors is: err on the side of caution when it comes to drawing conclusions on the back of political trends, particularly against the relatively healthy global economic backdrop we are experiencing right now. Importantly, despite political unrest, investment opportunities are there for the taking.

“Tactically we have an overweight position in Continental European Equities. To us, one of the big remaining opportunities of this economic cycle rests on the fact that the profitability of European companies in aggregate has lagged behind that of their peers in the United States. With the underlying economy now growing more briskly, we are already seeing some pricing power returning to her corporate sector, which in turn is helping profitability to recover some of that lost ground.” says Will Hobbs.

The six to 12-month outlook for the European economy is decent. Domestic demand is picking up, unemployment is falling, and generally speaking, wages are coming through more in northern Europe (with southern Europe expected to follow). Interestingly, a demand source could appear from the United States – despite the U.S. President playing a protectionist game.

“The U.S. administration has injected their economy with a load of fiscal steroids, with the labour force and the wider supply side of the economy already looking pretty fully utilised,” explains Hobbs. “It’s likely that a lot of this demand that they’ve dumped on this reasonably fully employed US economy will have to be satisfied elsewhere. Maybe Europe and Asia will benefit from this administration’s strangely timed fiscal largesse?” according to Barclays Head of Investment Strategy.

The European economy may be in a period of consolidation. But, as the continent takes a pause for breath, trying to look out for unpredictable recessions is a pointless strategy for investors.

“The future is unknowable – and reassuringly so. And therefore, the best protection against the unknowable is always diversification and a healthy scepticism for anybody who talks too confidently about what’s coming down the pipeline,” says Hobbs.

As nationalist populism continues to gather pace across Europe, a broad and globally diverse portfolio can help provide shelter. The most important mindset for investors though, is that economic growth is the norm, not the exception.

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