Europe: Perhaps The Best Destination For Capital In 2017
It’s been a few weeks since the Italian referendum that resulted in the resignation of Matteo Renzi as Prime Minister of Italy. Anyone who was closely watching markets at the time, knows that stocks rallied across the continent along with bond yields, as the market began to contemplate right-wing victories throughout Europe.
It might be tempting to paint this as a right-wing populist movement, and for sure, in many countries, it is. But in some cases, it’s not. France’s presidential election is rapidly approaching, and the lead candidate is Francois Fillon, the closest thing you get in France to a free market capitalist, an open admirer of Margaret Thatcher, in a country that has perhaps the most sclerotic labor market in the developed world. Fillon is not just talk; he is a reformer. Of course, there will be huge popular resistance to any liberalization in France (just imagine the protests), but it could happen. It is something to be hopeful about.
Likewise, Brexit was supposed to cause depression in Great Britain, and just the opposite is happening–GDP is printing higher than expectations. Now there is open discussion of the positive aspects of Great Britain being free of EU regulation as being a good thing.
Of course there was the Trump victory in the United States, which by now everyone knows about. Trump has gone on to assemble a free market economic Dream Team in his cabinet, something nobody predicted during the campaign.
A lot of these movements have been labeled as racist, misogynist, anti-immigrant, etc., and for sure, there has been plenty of nativism in some of these campaigns. But the one thing that the critics of this movement completely neglected was that this “right-wing populist” movement was in some cases very free market. We may not be coming off the confiscatory tax regimes of the seventies, but we are coming off of absurdly high levels of regulation, which will be rolled back substantially in the coming months.
As far as capital markets go, the U.S. has been the only game in town for international capital flows, owing to the strong dollar. It seems like everyone is pathologically short the euro at this point, and for sure, a shock like a Marine Le Pen win in France would send the euro down about ten big figures. But I think if Europe actually becomes growth-oriented, if it actually becomes a destination for capital, you could see a stronger currency, a higher stock market, and higher interest rates–much like is happening in the U.S. right now.
It’s uncommon for countries to liberalize after decades of economic control, but Argentina did it two years ago, and markets ripped, and Brazil is in the process of it now. Europe must do it–they must pursue growth, otherwise it is checkmate. The demographics are atrocious, and there is zero economic dynamism left.
It’s a bit early to be talking about this, but the nature of markets is that they discount heavily. I think the biggest surprise of 2017 could be that Europe has some of the best-performing stock markets in the world.