By Rob Bush, Deutsche Asset Management
Well, the storm of Eurozone disintegration that was threatening to engulf Europe has, it seems, abated for now. The decision of the French electorate to cast a resounding “oui” for Emmanuel Macron and a “non” to Le Pen suggests that the youthful President’s pro-European Union (EU) stance resonated. After the twin surprises of Brexit, and Trump’s election, we can chalk one up for the establishment.
But, actually, when one reflects on it, the commitment over the last several years that voters and policymakers have shown to European integration, as well as their ability to stave off a number of crises, has been quite remarkable. From the spiking of Periphery bond yields, through a looming Grexit, to the emergence of a wave of populist parties all clamoring for a breakup, Europe has managed to stand fast. Yes, Brexit was a blow of course, but the UK had never adopted the common currency, and it’s conceivable that the loss of a partner whose commitment was always somewhat wavering may actually end up strengthening the remaining bloc.
So, with the French election now behind us, it’s partly this removal of what was a critical source of uncertainty that has led our CIO Team to move to an overweight position on European equities (see Vive la France, long live Europe and its equities). Of course, political risks remain. We still have elections coming up in Germany in the fall and, perhaps more worryingly, an eventual resolution to the situation in Italy. But, even if the anti-EU Five Star Movement were to win that vote, it’s not clear that their path to a referendum (Itexit? Can you bear it?) would be a short or smooth one.
However, it’s not just the politics that have led the team to their call, far from it. There are in fact three other reasons why they believe that the case for Europe is strong: