A rein­ven­tion on the horizon?

Finweek English Edition - - THE OPTIMIST’S GUIDE: EUROPEAN UNION - Ed­i­to­rial@fin­week.co.za By Jana Ja­cobs

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Brexit, the elec­tion of Don­ald Trump and Italy’s ref­er­en­dum vote (Italy’s al­most-ver­sion of Brexit) in 2016, it is con­ceiv­able that up­com­ing po­lit­i­cal mo­ments will fol­low the trend.

But on 5 De­cem­ber, Aus­tria bucked the pop­ulist trend by choos­ing not to elect far right-wing fed­eral presidential can­di­date Nor­bert Hofer. Could this mean that de­spite con­cerns re­gard­ing the sta­bil­ity and fu­ture of the EU, as­sum­ing the worst might be pre­ma­ture?

Per­haps the up­com­ing elec­tions in Ger­many, France and the Nether­lands in 2017 may not go to right-wing politi­cians who are push­ing for anti-immigration and in­ward-look­ing poli­cies af­ter all.

Arthur Kamp, in­vest­ment econ­o­mist at San­lam In­vest­ments, cau­tions that we should not be too quick to de­clare we un­der­stand how vot­ers feel or which way they are likely to vote. “As we have seen, polls can get it wrong. One can only be cer­tain of an out­come once the fi­nal votes are tal­lied.”

One of the key votes in 2017 is the presidential elec­tion in France. There are con­cerns that right-wing can­di­date, Ma­rine Le Pen, will stand a chance of tak­ing the top job in France, bring­ing with her a Brex­it­like ref­er­en­dum for France to exit the EU.

Al­though 2016 has taught us that there is no cer­tainty or pre­dictabil­ity when it comes to the po­lit­i­cal in­cli­na­tions of the world’s cit­i­zens, Philip Saun­ders, co-head of Multi-As­set at In­vestec As­set Man­age­ment, is fairly optimistic that Le Pen will not win the 2017 elec­tion.

“I sus­pect that Ma­rine Le Pen will do well, but I think it’s highly doubt­ful that she will be­come pres­i­dent,” says Saun­ders. Go­ing by the ten­dency of past French presidential elec­tions, if Le Pen were to make it to the sec­ond and fi­nal round of vot­ing on 7 May, she would end up fac­ing one other can­di­date, which will ef­fec­tively be the So­cial­ist can­di­date.

“What will hap­pen is that the gen­eral cen­trist group­ing will likely com­bine, which will make it very dif­fi­cult for Le Pen to be­come pres­i­dent.”

If Saun­ders is right, then France will likely avoid be­ing gov­erned by a more na­tion­al­ist agenda.

Says Cindy Sweet­ing, di­rec­tor of port­fo­lio man­age­ment at Tem­ple­ton Global Equity Group: “On a more positive note po­lit­i­cally, how­ever, in re­cent months there has been a rising ex­pec­ta­tion that gov­ern­ments will in­creas­ingly start to fo­cus more in­tently on fis­cal stim­u­lus, and we ex­pect this theme to gain some trac­tion in a num­ber of ma­jor economies given the di­min­ish­ing returns of un­con­ven­tional mon­e­tary pol­icy. With business con­fi­dence still in de­cline af­ter a sig­nif­i­cant de­cline in global bond yields over the last seven quar­ters or so, and cor­po­rate capital spend­ing re­main­ing at very muted lev­els, it seems to make sense to look be­yond mon­e­tary pol­icy for some fis­cal so­lu­tions to help bol­ster eco­nomic con­fi­dence and growth.”

On the tip of eco­nomic pol­icy Saun­ders says, “If the Euro­pean Cen­tral Bank (ECB) ends up in a sit­u­a­tion whereby it will even­tu­ally ta­per its QE [quan­ti­ta­tive eas­ing] pol­icy”, this could be po­ten­tially sup­port­ive of the euro.

Sweet­ing adds that aus­ter­ity mea­sures in Europe seem to be wan­ing, and it seems that there could be in­creased moves to­wards in­fras­truc­ture spend­ing, “par­tic­u­larly if it helps al­le­vi­ate un­em­ploy­ment and mol­li­fies im­pa­tient elec­torates”.

Not boom­ing, but not bust

Al­though the Euro­pean econ­omy has come un­der pres­sure, and in­vestors will still be cau­tious to al­lo­cate to the euro, Sweet­ing says Tem­ple­ton views cur­rent po­lit­i­cal dy­nam­ics “as rep­re­sent­ing both a threat and an op­por­tu­nity for global growth. On the bright side, the rising like­li­hood of some fis­cal stim­u­lus could help spur cor­po­rate in­vest­ment and bol­ster nom­i­nal eco­nomic growth.”

At the time of writ­ing, al­though data for the fourth quar­ter of 2016 was sparse, Fo­cusE­co­nomics stated that the eu­ro­zone’s econ­omy has re­mained on even foot­ing. “The econ­omy has shown re­silience in the face of height­ened un­cer­tainty and the Fo­cusE­co­nomics panel ex­pects this to con­tinue, fore­see­ing GDP growth re­main­ing steady, al­beit lack­lus­tre, at 0.3% over the pre­vi­ous quar­ter.”

2016 may have been a tough one for the world, but 2017 will not sim­ply be more of the same.

“If you do see more of a global re­fla­tion un­fold­ing, which is sort of our cen­tral ex­pec­ta­tion, that will help Europe to some de­gree. Ef­fec­tively key risks that were at play in 2016, such as the risk of the US econ­omy slip­ping into re­ces­sion, will be much lower in 2017. Fur­ther, we’ve also seen some re­cov­ery in the de­vel­op­ing world.”

Europe still has its par­tic­u­lar po­lit­i­cal is­sues, but Saun­ders be­lieves two things that are in the eu­ro­zone’s favour is the cheap­ness of Euro­pean as­sets from an in­vest­ment per­spec­tive, and a global econ­omy do­ing bet­ter in 2017, which will benefit the bloc.

Ma­rine Le Pen, leader of the French Na­tional Front, dur­ing the in­au­gu­ra­tion of her presidential cam­paign head­quar­ters in Paris in Novem­ber.

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