European investors face a difficult year in 2016 as political uncertainty and the ongoing regulatory agenda weigh on a still fragile economic recovery, according to Jean Keller, chief executive (CEO) of the Geneva-based independent fund management firm Quaero Capital.
“The biggest challenge for the region is to put the economy onto a solid growth path,” says Keller. “We have seen some of those famous green shoots of recovery, but we need to have a clear trend of several quarters of above-average gross domestic product [GDP] growth before we start to celebrate.
“As monetary measures start to take full effect, we expect the recovery to show in the statistics. We just have to hope that the European Central Bank [ECB] and the politicians will let momentum build before they stop the stimulus.”
The combination of a heavy legislative agenda coupled with subdued growth and high unemployment is exerting huge pressure on the European ‘Project’. “This is reflected in polls across various countries,” says Keller. “Keeping European populations committed to integration is much harder if economic growth is lacklustre. We will probably see more protest votes as already experienced in Greece, France and Hungary. That is a potentially explosive mix when coupled with a migrant crisis of gigantic proportions, and a wider backdrop of uncertain global economic growth.”
The end of easy credit in the US, where on Wednesday the Federal Reserve raised its key interest rate for the first time since 2006, will mean further market volatility, and pressure on fixed income investors. In Europe, interest rates are at an historic low and savings are being destroyed. The real challenge for sophisticated investors will be to find investible alternatives outside the equity markets.
Paradoxically, smaller European companies – which are unlikely to be affected by political volatility – are starting to benefit from the slow recovery and measures taken to support it. “This should be good for our equity funds,” Keller says. “On another front, governments’ focus on infrastructure should play into our hands nicely as well. There are many opportunities coming from the Juncker plan and we see a very strong deal flow. It is still subject to political wrangling, but it is very appealing.”
The return of opportunity
More widely, opportunities for investors are re-emerging in Asia, as reaction to China’s economic slowdown calms down. Most Asian stock markets are trading at very low valuations. “China could slow further, as the authorities conduct the perilous exercise of transforming the economy,” says Keller. “However, most fears have been discounted and some shares are now trading at significant discounts. Hong Kong H shares [shares of companies incorporated in the Chinese mainland that are listed on the Hong Kong Stock Exchange [HKSE] or other foreign exchange] are on a par with Zambian stocks, which is just silly.”
For asset managers, Europe’s regulatory agenda for 2016 will remain dominated by the Undertakings for Collective Investments in Transferable Securities [UCITS V] and the Markets in Financial Instruments Directive [MIFID II], which impact every aspect of their business, from cost and compensation to distribution and suitability.
Keller comments: “Once again, it will require substantial energy and capital to adapt business models and implement the new rules. It is especially challenging for boutiques, and margins for all businesses will be squeezed. But there is a sense that some balance is finally being restored to redress regulatory overkill, which is very welcome.”
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