As tempting as a two-week-old fish: that’s how we see European companies.
That’s probably a little harsh, but only just. There are some European companies we own, but these are interesting businesses in unusual niche industries that could be based anywhere. That’s because they make most of their money overseas, far from the political and economic ball of knotted twine we all know as the Schengen Area.
Businesses that live or die by the vicissitudes of European economies are not for us. As long ago as 2016, we listed the things that put us off investing on the Continent: banks chock full of dodgy debts, people dead set against helpful reforms and a fundamental weakness in its quasi-federal make-up. Today, a coalition of fringe politicians are failing to deal with the mountains of debt in Italy’s banks and public debt; angry workers in hi-vis vests are thwarting labour reforms by a French president haughty enough to be Napoleon himself; and in May elections EU countries are expected to fill a third of the European Parliament with MPs who believe the organisation shouldn’t even exist.
You can see how all of this could be bad for business.
There are new issues to add to these as well. Germany is looking tired after many years of bucking the wider Continental trend. Its factories made much less stuff in the last quarter of the year and its people are spending a lot less than you would expect, given strong wage growth and very low unemployment. Germany – and the EU generally – is very sensitive to fluctuations in Chinese economic growth. While we believe China isn’t going to tumble into a meltdown, it’s beyond questioning that it’s slowing down and will continue to do so. This will almost definitely have ramifications for European industry.
Put simply, every time someone swings by with an argument that “now’s the time to buy Europe” – and it happens with surprising regularity – it never entices us. We think Europe needs a more integrated system of government spending (unlikely we know) to deal with unintended consequences of the European project by allowing German and French taxes to pay for Spanish and Polish welfare (and vice versa), so that the bloc can better deal with downturns. Also, its banks have to admit many of their unpaid loans are near-worthless, and its people have to accept changes to labour laws to make work sustainable and eradicate criminally high unemployment among the young. All of these involve a measure of pain and sacrifice – which is why we’re not holding our breath – but they are necessary for Europe to break away from a sad trajectory that is a worrying mirror of Japan.
Since the 1990s, Japan has been stuck in a quagmire of mounting debt and stagnant growth. Not even huge amounts of financial engineering by its central bank over a period of decades – who do you think invented quantitative easing (printing money to buy stocks and bonds from investors)? – could help Japan. Seen in that light, the rumour that European Central Bank is preparing to extend its financial engineering, rather than wind it down, seems ominous.
That’s why we tend to steer clear of Europe. Most of our investments tend to be in large, quality companies which are typically based in the US. They sell to the world, but they are run well, have products and services that you simply can’t find anywhere else, and are surrounded by Americans – people that celebrate business success.
We haven’t even mentioned Brexit (whoops) – continued uncertainty and brinkmanship politics is as negative for Europe as the UK.
Rathbones Multi-Asset Portfolio Funds Manager
Hear more from David at The Scotsman Annual Investment event on March 5th, click this link for more information and to book your free place.
This is a financial promotion relating to a particular fund range. Any views and opinions are those of the investment manager, and coverage of any assets held must be taken in context of the constitution of the fund and in no way reflect an investment recommendation. Past performance should not be seen as an indication of future performance. The value of investments may go down as well as up and you may not get back your original investment.