Europe Reworked: The Impact of Political Change

Martin Currie’s European Long/Short team believes opportunities will exist for investors as Europe’s political landscape is redrawn. Over the next 12 months, politics will undoubtedly remain one of the key macro themes for Europe. With a packed list of elections, rising anti-establishment sentiment and the re-emergence of Greek debt, these factors will play a crucial role in determining the future direction of the European Union (EU).

24 October 2016

Michael Browne, Portfolio Manager, European Long/Short Strategy at Martin Currie comments:
“In an increasingly fractured political environment, consensus may appear hard to come by. However, the potential for change may in actual fact provoke harmonisation. The backdrop of continued low growth and political separatism could be the catalyst for individual governments taking action to stimulate their respective economies, which could shift the region’s overall direction. We believe administrations are now more likely to use fiscal measures, particularly considering the European Central Bank’s loose monetary policy appears to have run its course.”

Martin Currie’s European Long/Short team believes that in order to be effective, the emphasis for government spending will need to be on ‘shovel-ready’ projects which will have an immediate impact. From an investment point of view, it is from this area that the team would expect to see the most interesting prospects for long-term growth stocks.

Michael Browne continues:
“Should the risk parameters rise, for example from another Greek collapse, or a far-right government in France, then it is important for an investment strategy to be able to take a flexible and pragmatic approach. In these circumstances, a long/short approach is invaluable. While some of these growth themes require a longer time horizon to play out, in the shorter term, the possibility to short companies failing to adapt to the current economic environment allows us to manage volatility and protect the downside.”

Martin Currie’s long/short team believes that the current scenario of low-growth offers a number of short-side opportunities, with banks the obvious starting point.

Michael Browne adds:
“We have seen falling margins driven by interest rates and institutions which are very slow in the process of cutting costs out of their businesses. Airlines too are suffering, due to overcapacity and falling demand, together with the impact of oil hedging and an inability to pass costs onto consumers until next year. Irrespective of the short-term political upheavals happening in the next 12 months, what shouldn’t be forgotten is the inherent quality of many European companies.”

The view of Martin Currie’s European Long/Short team is that Europe is home to many world-class businesses. These companies are leaders in their sectors, deriving their revenues from international as well as domestic sources, with a solid foundation for long-term growth.

Read the full Active Viewpoint: Europe Reworked – The impact of Political Change by Michael Browne, Portfolio Manager, European Long/Short here.