Money management executives are working to reconcile opportunities in European equity and debt markets with increasing political risk.
Some think European growth is on the upswing, and the region's equity markets offer opportunities. Others note that bond spreads have widened over recent weeks as France's National Front Party, led by presidential candidate Marine Le Pen, saw a surge in popularity over rival candidates encircled by rumor and scandal.
Sources expect Ms. Le Pen to triumph in France's first round of elections next month. A second round will follow in May to determine the victor.
But executives say they want to see a further widening of French government bond spreads before they switch into buy mode.
“Political uncertainty is here to stay, given elections in three key (European Union) member states and the dawn of the Brexit negotiations,” said Michael Herzum, head of multiasset strategy at Union Investment in Frankfurt. “At the same time Europe's cyclical growth outlook is better than ever since the outbreak of the euro crisis.”
Mr. Herzum said the better growth outlook will lead to slightly higher inflation rates in the eurozone, reinforced by a rebound in commodity prices and “the presumably reflationary policies of the new U.S. administration.” Although the situation remains far from normal, he said the threat of deflation in Europe is diminishing — as is the need for ongoing high monetary stimulus from the European Central Bank. He expects the ECB to taper its asset purchase program sooner rather than later, because its room to “maneuver is shrinking substantially, as it will approach the binding purchasing limits ... in the first half of 2018, at the latest,” he said.
These elements have come together to create implications for investors.
It is incredibly challenging at the moment,” said David Hussey, London-based senior managing director, European & EAFE equities, at Manulife Asset Management (Europe) Ltd. “We have been waiting for years for Europe to get its day in the sun, margins to normalize,” and for growth to rival or surpass the U.S., and we “kind of feel we have a chance now. But what makes me nervous is obviously politics,” he said. Mr. Hussey said spreads in sovereign bonds reflect political concerns.
“The degree of political uncertainty is likely to have a strong impact on the performance of sovereign bonds,” said Mr. Herzum, particularly as election campaigning peaks in France, the Netherlands and Germany. The Dutch go to the polls this month, and Germany's federal election will take place in September.