Europe - turning the corner
By Richard J. Wylie, CFA
Vice-President, Investment Strategy, Assante Wealth Management
During the aftermath of the global financial crisis in 2008-09, Europe’s sovereign debt situation made regular headlines. Concern over the survival of the European Union proved to be one of the primary drivers of volatility during much of that period. More recently, the negotiations around Brexit and the resultant uncertainties with respect to trade and politics have provided additional rationale for avoiding the region. However, the continued low interest rate environment coupled with efforts to control government debts and deficits are now being accompanied by a move away from the more strident, isolationist, political language. These developments have formed the basis for an improved outlook for the region, both economically and from an investor’s perspective.
As has been the case with all major central banks, the European Central Bank (ECB) has maintained easy monetary policy. Against this stable backdrop, efforts to reduce government debt burdens and an increased willingness to negotiate agreeable terms has allowed the region to turn a corner. As well, the election of French President Emmanuel Macron has signalled a step away from the more isolationist sentiment that previously appeared to suggest an imminent breakdown of the European Union.
With these fears diminishing, the economic picture looks brighter. As can be seen below, the latest International Monetary Fund (IMF) outlook revealed upgrades for GDP forecasts for the region’s two largest economies plus the formerly troubled PIIGS nations (Portugal, Ireland, Italy, Greece and Spain). These upgrades come even as recent data on economic growth have been stronger than expected.
Industrial production in the European Union jumped 1.4% in August, pushing annual growth to 3.8%. This is a dramatic improvement as an annual decline in output was reported as recently as July 2016. Labour conditions have also improved. The unemployment rate in the region was reported as 9.1% in August 2017, the same as the previous two months. Even though this appears relatively high by North American standards, it is the lowest jobless rate since February 2009. Additionally, it is down from the 9.9% level that prevailed in August 2016 and significantly lower than the 12.0% level seen in 2013.
While the ECB continues to hold its benchmark refinancing rate at 0%, where it had first been set in March 2016, it confirmed that net asset purchases are intended to run at the current monthly pace of €60 billion only until the end of 2017. A gradual reduction in purchases is anticipated for the beginning of 2018. The need for the additional monetary stimulus provided by this quantitative easing (QE) program is expected to steadily diminish after that. An end to this QE program will likely follow the pattern set by the U.S. Federal Reserve as it is now winding up its QE program.
Concerns over investing in Europe over the past several years have been based on a number of uncertainties. Not all of these uncertainties have disappeared. Brexit negotiations will leave trade questions on many fronts, at least for the medium term. The Catalan independence referendum will create additional uncertainties. However, the region’s wider fundamentals have improved. Taking advantage of professional advice can help ensure that an individual’s investment portfolio is well diversified and will be able to benefit from underlying improvements – wherever they materialize.