Europe is the weakest geographic region globally, in our opinion. It suffers politically from a potential for Brexit and possibly Italexit, and the upcoming European Commission elections in May that could witness 25% of the members of the legislature representing populist parties from the extreme left and right. It has some $3.1 trillion of negative interest rate bonds that the ECB’s moves recently only exacerbates. Negative interest rate bonds undermine the foundation of the financial systems in which they proliferate by killing the banks that are absolutely key to financing Europe. The banks cannot make money with such low net interest margins. They also have issues with Russian money laundering problems that could lead to massive fines. Also, low population growth and structural impediments to productivity impair Europe’s growth potential relative to the rest of the world even with a more positive backdrop.
The trade tariff update as it pertains to Europe is that President Trump wants Europe to accept more US agricultural products in return for no increase in European auto imports tariffs. Autos are among the items that Europe manufactures best, so President Trump’s proposal is a clear threat to Europe’s economy. The problem for the Europeans is that European farmers cannot begin to compete with American farmers who operate on a massive scale and deploy the latest technology including drones and software vs. the European farmers who typically operate on a much smaller scale. In essence, the European farmer cannot compete with the Americans, but the European farmer has political influence beyond their economic might. That puts European politicians in a jam. They cannot afford to lose the economic foundation from their economically competitive autos, but they cannot do without the support from the agricultural base. Europe is not in recession with muddling GDP growth in the 1-2% range, but it bears watching for any additional weakness caused by upcoming elections or other geo-political events. Cheap markets are not enough to turn sentiment towards Europe, there has to be some change in the fundamentals to warrant capital allocations.
Opinions represented are subject to change and should not be considered investment advice. Forward‐looking statements are necessarily speculative in nature. It can be expected that some or all of the assumptions or beliefs underlying the forward‐looking statements will not materialize or will vary significantly from actual results or outcomes. This material has been prepared using sources of information generally believed to be reliable; however, its accuracy is not guaranteed.