There have been many potential existential threats to the European project over the last 15 years that have created uncertainty for investors. Remember the sovereign debt crisis, the populist uprisings in Italy and Spain, Brexit, and the ever existing COVID-19? How could we forget? Even the French Presidential election of the last couple of weeks has heightened sensitivities and brought back memories of times gone by. (Fortunately, this is now one less uncertainty we have to deal with).
All these ‘events’ made investors forget the broad and deep pool of investment opportunity that Europe can present. The focus, as ever, moved to the structural ‘imperfections’ of Europe, such as the effectiveness of a single monetary policy for separate sovereign nation states with different political and economic profiles or the need for consensus and compromise amongst the 27 countries of the European Union. A great excuse for steering clear in spite of European companies proving time and again that they can prosper through all weathers.
When it comes to existential threats, one could argue that the recent invasion of Ukraine by President Putin, thus causing a war on Europe’s doorstep, is one of the biggest challenges yet. What was the reaction? One of the largest outflows from European equity markets on record according to Bank of America. However, the European reaction to the Ukrainian crisis has been far more telling and investors should take note, in my opinion. Europe has been catalysed into action and come together far more effectively and at a rate that was faster than expected; decisions that previously took months, have been made in the space of a weekend and Europe, for the moment, is showing a united front; something that has at times been lacking over the last 15 years. In spite of the uncertainty the Ukraine crisis has added to an already uncertain world, one needs to take a step back and consider the potential implications and consequences of what Putin has wrought. It is also worth remembering that, as investors, we are not investing in the countries or the politicians of Europe, but the companies that happen to be listed there.
So, in spite of the current concerns around inflation, monetary tightening and growth concerns that all asset classes are having to grapple with at the moment, where do we see the investment opportunities? At some point the sun will come out again in Europe as it has shown many times before. When the market shortens its investment time horizon, it is usually time to lengthen yours.
It is clear that the Ukrainian crisis has accelerated the need for Europe to be certainly less reliant and perhaps totally independent from Russian energy. It looks as though we will see the acceleration of the planned decarbonisation of the European economy. The REPowerEU communication announced on 8 March 2022, only 10 days after Russia’s invasion of Ukraine, saw an extension of the Fit for 55 plan with an aim of ending the EU’s dependence on Russian gas. The consequences of this announcement are far reaching and change the complexion of European energy policy and the investment landscape.
Post a multi-year period of monetary loosening – low rates and cheap money – the tide has clearly turned. Post COVID-19 and the Ukraine crisis, inflation has reared its head, growth is slowing and the market for the moment is struggling to quantify the extent and impact of the effects. What is clear though is that interest rates in Europe look likely to follow the US and UK. Again, it is crucial to understand the impacts this will have on companies across Europe; on their competitiveness, pricing power, returns and ultimately their ability to grow.
The implications for growth and corporate cash flows of a more challenging global and European economy are potentially far reaching. It is clear that the focus of the market has moved from just ‘growth at whatever the price’ and that self-help, cost efficiency and M&A will become more important considerations again. Coupled with the fact that COVID-19 and the ongoing geopolitical turmoil is challenging, the concept of globalisation makes for a very interesting and dynamic investment environment in which to identify potential beneficiaries and invest in them.
Over the next few months we will explore where we see these potential opportunities and how they pertain to an equity income strategy in particular. Whatever one’s view of the world, dividends, in my opinion, are going to play an increasingly important part in delivering equity total returns.