Transcript: Investors breathe sigh of relief after benign European elections

The rise of Labour in the U.K.

LM: In terms of the U.K. election, investors had already discounted a Labour victory and therefore it had very little impact on markets. The fact that Labour only received 35% of the vote means that its mandate is not as strong, and as a result, it’s less likely to do anything extreme on the policy front. The less chaotic and more predictable policy backdrop could boost business or consumer confidence and increase investment going forward. Labour has suggested it wants to start a national wealth fund to invest in industry and infrastructure. The U.K. has also experienced a severe housing shortage, and Labour has indicated it will try to boost supply by 300,000 units per annum over the next couple of years, and this should be a positive for the housing sector in the U.K. Labour is trying to prioritize stability. It means little change in policies, although we will see the introduction of some wealth taxes and increases in minimum wages under a Labour administration. But overall, the impact on policy and the economy and markets is minimal.

Halting the right in France.

LM: The biggest fallout from the European elections was the calling of the snap election in France by [Emmanuel] Macron, after he was heavily defeated by the far right in the European elections. Immediately after that, French 10-year bond spreads against Germany widened from about 48 basis points up to a peak of about 80 basis points on the fears of fiscal slippage. The result has been a hung parliament. No clear majority for any party means that the likelihood of more extreme, loose fiscal policies is now very much reduced. And that’s a relief for markets, particularly for French bonds. However, the political uncertainty may mean it may take several weeks before a government is formed. There are several possible outcomes. One is that the left joins with Macron acting as control on the left. The second option is if Macron tries to spin out some more moderates from both the left and right, bring them into the centre, and form a grand coalition. I think this would be the best outcome for the market. The final outcome is you could have outside business people being appointed in a technocratic government. The level of uncertainty and policy paralysis that you could see in coming weeks probably means that French spreads are going to remain higher than they were pre the election. Very short term, I think the equity market direction will be driven really, by what we see on the spread front. But overall, I think the likelihood of French stocks underperforming over the next while is more likely than not.

Where the European economy could be headed

LM: Europe effectively has stagnated the last couple of years and has lagged the global economy. And Europe barely avoided a recession last year. The outlook has improved this year. So if you look at Q1, we saw growth on an annualized basis of 1.3% in the Eurozone. And when we look at forecasts for growth in 2024, they’ve risen from 0.2% at the start of the year to 0.8% currently. So a big improvement. The labour market is strong. Unemployment is at a record low of 6.4%. Employment in the first quarter grew by about 0.3%, slower than what we were seeing last year but still positive. Wages remain firm. Consumer balance sheets are quite strong. We have excess saving in Europe of about 1 trillion euros and that should be a big, big buffer in support for consumption going forward. One thing I’d mention about Europe, however, is that trend growth is significantly lower than what we see in the U.S. and other markets, estimated at somewhere between 1% and 1.5%. So growth in Europe always looks low and looks modest compared to the U.S. and some other regions.

And finally, what are the bottom-line implications for global investors?

LM: The immediate impact on markets from the various elections that we’ve had, with the exception of France, has been very limited. The outlook we believe for European markets is positive, particularly, I would say, European sovereign bond markets. And it’s definitely a better position than people were concerned about or fearing maybe three or four weeks ago.

Well, those are today’s Soundbites, brought you by Investment Executive and powered by Canada Life. Our thanks again to Lenny McLoughlin of Irish Life Investment Managers. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.

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