The TEXPERS Blog

Europe: 5 scenarios for investors to watch

Photo: Pexels/Slon_Dot_Pics

By Arnab Das, Guest Columnist

The future of the euro and that of the European Union are inextricably tied. The big question is how could today’s political landscape impact the region in the coming months and years – and what does that mean for investors?

The rise of populism – The European political landscape is pockmarked with populism as anti-globalization and anti-European sentiment continue to rise. Driven by issues such as mass migration, cultural liberalization, and national sovereignty, populist sentiment is, as we note, making Europe’s political battleground “hot” and harder to navigate.

North versus South: The spirit of populism differs vastly in Northern and Southern Europe. Northern populists in countries like the Netherlands tend to be right-leaning and populists in southern countries, like Italy and Greece, lean left. This north-south divide adds further fragmentation at a time when centrists are pushing for consensus in Europe. Could different forms of populism torpedo all hopes of cooperation?

Weakening ties with U.S.: With a big U.S. focus on “America First”, the risk of U.S.-EU trade war is real and could see Germany — with its huge trade surplus with the U.S. — hit the hardest of all. At the same time, we see such tensions giving rise to the very real possibility that Europe’s key defense guarantee might be hollowed out. No fan of NATO, Trump has characterized the EU as free-riding on U.S. support.

The rise of Russia: Russia is creating more instability in the region — President Vladimir Putin continues to promote Russian interests and to expand its sphere of influence, often at the expense of European interests. With NATO becoming increasingly fragile, the political rebalancing taking place between Europe and the U.S. will no doubt rattle Germany. The country’s high trade surplus and its overtly export-oriented economy has fueled discontent among allies, particularly the U.S. with whom its trade surplus topped €66 billion in 2017.

Energy and military strength:  Germany is also reliant on imported energy. In 2016, 32% of its coal and almost 40% of its oil came from Russia. We point out that Germany’s energy dependence underlines how frail its bargaining power is in a Europe facing disintegration and diminished security in the face of a weakened NATO. France could emerge a winner, with its strong military and a more favorable trade surplus with the U.S. Energy-wise, it’s also heavily reliant on its own network of reactors which are majority owned by the government.

Implications for investors – These developments will certainly impact markets and the euro but the extent of that impact depends on which way Europe evolves. Serious progress between countries and further integration is likely to lead to significant and sustained compression of country risk premia across bonds, credit and equity. However, should Europe move to disintegration, then that is likely to permanently widen some country risk premia.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of Invesco Fixed Income or TEXPERS. 

Arnab Das

About the Author:

Arnab Das is head of Europe, Middle East and Africa and Emerging Macro Research at Invesco Fixed Income.  He joined Invesco in 2015 and is based in London. Das began his career in finance in 1992. He has served as co-head of research at Roubini Global Economics; co-head of global economics and strategy, head of foreign exchange and emerging markets research at Dresdner Kleinwort; and head of Europe, Middle East and Africa research at JP Morgan. He has also been a private consultant in global and emerging markets, and previously consulted with Trusted Sources, a specialist EM research boutique in London. Das studied macroeconomics, economic history and international relations. He earned a BA degree from Princeton University in 1986, and completed his postgraduate degree and doctoral work at the London School of Economics from 1987 to 1992.