Investors breathe sigh of relief after benign European elections

“The worst fears, in terms of the far right or far left getting into power and coming through with a very loose fiscal policy agenda, [have] been prevented,” he said. “Election results have had very little impact on markets in the short term.”

He pointed out that the complexion of the European Parliament is only slightly changed because right-wing parties surged in some countries while there were leftward shifts in other countries.

“The centrists have maintained a majority, albeit smaller than it was previously,” he said. “The result is that the overall policy agenda is unlikely to see any significant change.”

U.K.

Meanwhile, the U.K. has a new Labour-led government, but McLoughlin said it’s a Labour Party that has moved toward the middle in recent years, and one that has confirmed its commitment to fiscal responsibility.

“They want to be seen as a more corporate-friendly, international-friendly entity than it has been seen in the past,” he said. “But in the immediate term, it’s unlikely to make any major changes to policy, given the fiscal restraints that you see in the U.K. at the moment.”

France

The biggest shake-up was in France, where a first round of voting looked promising for the right-wing National Rally party, causing spreads on French 10-year bonds against Germany to widen from 48 basis points to a peak north of 80 basis points.

While a centre-left scramble in the second round of voting avoided a dramatic change in direction for the country, it also left the country at a crossroad, McLoughlin said.

France’s centrist president Emmanuel Macron could work with leftist parties to form a left-of-centre government. This might incite fears of fiscal loosening, resulting in bond spreads settling in the high 60s and low 70s, he said.

If Macron manages to build “a grand coalition” of moderates and retain a centrist posture, the greater implied fiscal discipline would likely reduce bond spreads to the mid to high 50s.

“I think this would be the best outcome for the market,” he said.

If the parties fail to form a government, however, and a caretaker government of business leaders is put in charge, policy initiatives would grind to a halt.

“If you see a technocratic government, I think spreads will stay where they are currently, around 62 to 63 basis points,” he said.

Europe

Seeming to have dodged a bullet of fiscal excess, Europe is poised for growth, albeit at a continued slow pace, McLoughlin said.

The war in Ukraine has been a big drag on the economy, and inflation put a squeeze on corporations and consumers alike, he said. As inflation cools, however, the labour market appears healthy, with unemployment at a record low of 6.4%. Real wages are positive again and consumer balance sheets are strong.

“We have excess saving in Europe of about 1 trillion euros. And that should be a big buffer and support for consumption going forward,” he said.

He said investors have grown used to seeing modest growth in Europe compared to the U.S. and other regions. But an improving fundamental backdrop has led to a growth forecast of just below 1% for this year and slightly above 1% next year.

McLoughlin said governing a broad expanse of people with widely diverging political views is a challenge, but Europe is adapting to new political realities.

“New equilibriums will be found that will allow for growth,” he said. “It’s a case of recognizing the differences, [being] willing to adapt to them and working together. I think a path forward can be and will be found, as has been shown in Europe in recent weeks and years.”

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.