The constant debate of leading and lagging indicators is one that spills over to the political components as well. The timing of demographic shifting, recent economic events, geopolitical tectonic shifts taking place globally and neo-creative monetary policy have all been pointing to voter sentiment evolving. We have seen this represented in Europe for some time and the recent European Parliament election saw more than sublime results.
While trying to paint the results with a broad paint brush is shallow and dangerous, the one result that cannot be discounted was the increased presence of the resistance to more European Union integration. In light of the tremendous amount of austerity pressures and dichotomy of economic progress since the Great Recession, this result is less than dramatic.
According to Moody’s review of the results, the Eurosceptic party’s share of seats rose from 13% in 2009 to around 20% in 2014. France, Denmark, Greece and the United Kingdom all had proportionately larger gains from anti-European Integration parties than other countries, though there were almost gains all the way around for this challenge to the broadening of the European Union.
Moody’s put the results as credit negative for France and Greece and put it as positive for Italy. For a quick trip down memory lane – which is a very busy road since we seem to forget the directions that got us to this particular point – remember the severe amount of austerity measures forced upon Greece. Greece Treasury debt from June 2009 proceeded over the next three years to drop 82.1% while they were in the throes of a vicious economic and austerity downward cycle. Since the bottom of May 2012, we have seen an increase of 509%. For those who are curious, had you bought in June 2009 and held until now, your annualized yield would have been roughly 1.7%. The moral of the story continues to be that contrarian plays often yield the best results, even though they are the hardest to come by.
The second part of the story was the increasing rhetoric of the apocalyptic underground that continued the warning that Italy was the biggest bomb yet to drop. However, under the same timeline as above, the largest drop in Italian debt turned out to be a drop of 6.48% only to see it recover 45.5%, or an annualized return since the trough of roughly 17%. Now fast forward and the favored results of center left Partito Democratico (Italy’s Democratic Party) mitigates fringe policies and therefore Moody’s believes it’s a credit positive.
Where this leads us is the reaction of the European Central Bank (ECB) both immediately following and ongoing. With the results, it was of no surprise that ECB President Draghi came out following the election to consciously address the Eurozone employment which currently stands at 11.8%, which is still near its all-time high of 12%. This is in comparison to Germany which stands at 6.7%, and you see the brewing of a battle between the haves and have-nots. The ECB will announce their rate decision on June 5, and most are expecting a cut.
What most will be looking at is the progress or addressing of the potential quantitative easing (QE) which most definitely would be a game changer. Though the enacting of QE would be challenging, the mere threat of it caused a slight drop in the Euro versus the dollar. If this were to occur, we would expect the Euro to drop more and therefore improving the export outlook of the European Union.
One must ask themselves when projecting future conditions, is there ample data to make a reasonably accurate prediction? In our opinion, there is more than enough data; the challenge is organizing the immense amount of data to spit out projections. Since very intelligent and experienced minds may read the tea leaves differently, it is extremely important to understand the “why.” Our view is to meld the multitude of correlated and non-correlated data to arrive at a reasonable conclusion. As such, we continue to see positives for the European equity markets, particularly the PIGS (Portugal, Italy, Greece and Spain).
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