by Matthew Kuhn, CFA
The news from Europe in recent months has been dominated by elections, populism and the supposed dire future of the European Union. At the same time, international and emerging market stocks have been the best performing asset classes for 2017. Why the dichotomy?
Over the past couple months, several European elections have showcased the rise of populism in Europe. The popularity of nationalist candidates such as Marine Le Pen in France, Geert Wilders in the Netherlands, and Beppe Grillo in Italy is unprecedented in modern Europe. These candidates, and the parties they represent, all share one common trait: a deep mistrust of the European Union.
The growing popularity of these candidates reflects a growing trend in the population of Europe: doubt as to whether or not the European Union is beneficial to them. It’s all well and good to talk about grand liberal values, but most people are simply concerned about whether they win or lose from a particular deal.
Even before the current trend, however, the European Union was on shaky ground. A monetary union without union of fiscal policy is a recipe for failure, and so far no countries have expressed interest in giving up control of their fiscal policy. Given the current environment, further integration of policy seems unlikely, so the European Union will remain unstable in this regard.
So far, the only populist successes have been the Brexit vote and the election of Donald Trump. For now, at least, the European people at large are still choosing to protect the European project.
International stocks as measured by the MSCI World Index are up 1.9% in the past two weeks and almost 11% since January 1st. This performance can be attributed to not just the elections, but also to current relative valuations and future growth potential.
With the recent victory of Marcon over LePen, a “relief rally” in European and emerging markets has ensued. Both the Wall Street Journal and Barron’s have come out with front page articles saying now is the time to “Buy Europe”. Their recommendations do not hinge solely on the recent French “victory” over populism. A larger part of their recommendation is based on the fact that international stocks have underperformed U.S. stocks over the past eight years – the longest such run in the past 40 years. Also, growth and expected return projections for Europe and emerging markets are coming in much higher than those for the U.S.
There is always more to the markets than what is seen on television and blasted from the headlines. Careful consideration of all aspects of an investment – political, demographic, economic, and relative value, to name a few – must be made when considering the broader implications of that investment on the portfolio.
We at Harris Financial Advisors will continue to monitor the situation in Europe and its implications for your portfolios.
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