Brewin Dolphin's head of research, Guy Foster, takes a look at the political landscape in Europe, while we are in the throws of the French election.
'This is a key week for the US versus European shares dilemma. I’m writing this blind in terms of some of the most important news, for example the anticipated release of details of the US administration’s tax reform plans and the ECB’s latest deliberations on monetary policy (where an acceleration of asset purchase tapering is expected).
Plenty looks to have been resolved though, most obviously the thorny issue of the French presidential election. The final vote is still more than a week away and this is clearly a crucial period for France. With only one moderate and one extremist left in the electoral competition, the potential of an act of terrorism or a strategic WikiLeaks release to change the path of Europe is almost certainly elevated.
But in the absence of something dramatic happening, and even if plenty of Macron’s lukewarm supporters stay home in a fit of complacency, it looks very difficult for Marine Le Pen to triumph.
This year has seen the gentle ebbing away of political risk in Europe, with first the Dutch and now likely the French election passing without incident.
Out has also gone the tide of optimism about the Trump administration, which reaches its symbolic 100th day this weekend. So far victories in government are few and defeats are many for America’s populist president. His advisory team has been subtly reshuffled, with moderate candidates taking the fore.
What does this tell us?
Trump’s experience, and that of Alexis Tsipras in Greece or Timo Soini in Finland, suggests that delivering on promises in government is far harder than making them during campaigns. So, just as too much hope is placed in populists by the electorate, too much fear of them is probably exhibited by investors.
The defining difference between developing and developed markets is the robustness of institutions which hold such forces in check.
From an investor’s perspective, the figurehead of any government will be unable to do too much damage if the checks and balances remain in place to subject them to scrutiny. It is only when those checks start being diluted that lasting damage is done to investments and electorates.
That should come as some relief to investors in Europe because although Macron’s likely victory will offer a measure of stability there also needs to be an election in Italy by May 2018, at a time when the populist Five Star Movement has recently taken the lead in polls and Euroscepticism seems to be growing.
Italy has stagnant population growth and although GDP has been recovering along with the rest of Europe, service sector employment growth has been sluggish.
How to invest against this backdrop?
It’s always important to invest knowing the hopes and fears of other investors, so rotating from the inflated optimism for the US into Europe’s collective sigh of relief remains attractive.
It won’t be plain sailing, but Europe has more attractive valuations, better economic momentum than the US currently, and politicians for now seem unable to do too much to disrupt that.'
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