Quo vadis, Europa? Europe dominated debate at our Frankfurt Investment Forum
Our latest Investment Forum took place today in Frankfurt, just weeks after the latest European Union elections. With the enduring uncertainty around Brexit adding to the mix, this backdrop made for a lively discussion about the prospects for Europe, both politically and economically.
Our twice-yearly Investment Forum provides a platform for our investors and strategists to debate the ideas that underpin our long-term investment strategy for clients. As an active asset manager, we believe in testing and fine-tuning our convictions, and the Forum is a key part of how we do that. While the location ensured Europe was a prominent theme, we also discussed climate change, the ongoing trade tensions between the US and China, and the implications for investors. Here are a few highlights.
Europe is at a political crossroads
Europe faces a reality check. The world is no longer Europe-centric, as evidenced by the global pre-eminence of the tech giants from Asia and the US. Populations are ageing and increasing expenditure on health care and welfare weighs on domestic economies. While nationalist parties failed to make the expected headway in the European elections, there remains a sense that the EU needs to prove its value and purpose.
Over a quarter of a century since the Maastricht treaty was signed, Europe stands at a crossroads. One possible outcome could see Europe form a stronger union with greater accountability among nations. But it is equally feasible that nationalism could spread, hastening the disintegration of the EU and euro zone. Despite these stark possibilities, 61% of the Forum audience expect the EU to continue to “muddle through” – rather than make determined steps towards greater integration or, indeed, begin to come apart at the seams.
Our consensus is that the EU needs a unified approach to tackling climate, defence and energy issues. And to fund growth and innovation, it needs to deepen its capital markets, which will in turn help foster entrepreneurial spirit.
Europe is in the middle of the US/China trade rift
Europe also faces other significant challenges. For example, it is caught between two global superpowers – the US and China – engaged in a trade war and a “tech cold war”. Global trade has grown increasingly complex, and the value chains for many corporations are global too. That means Europe will likely be exposed to the effects of tariffs, regulations, compliance challenges and other issues created by trade friction beyond its borders. Further, the possibility of trade tensions developing between the US and EU should not be underestimated, particularly around auto tariffs.
Innovation is rife in Europe – but innovative ideas often move elsewhere
Despite the headwinds facing corporate Europe, the region remains a hotbed of technological innovation. According to Boston Consulting Group, 16 of 2019’s top 50 most innovative companies globally are Europe-based, although the region is home to just one tech company with a market cap above USD 100 billion.
While Europe doesn’t lack innovation, it often struggles to monetise it. And, arguably, the European business culture is less tolerant of failure than the US. This imbalance has pushed many European innovators to relocate to the US. This trend is likely to continue, creating more challenges for the sector. Talent may be harder to find, and market fragmentation could create more regulatory burdens and tax complexities. The good news is that Europe benefits from the value created by global innovators that operate within its borders. The EU could even make this work to its advantage. Irrespective of domicile, it should not be afraid to regulate and tax these firms’ European operations as it would European companies.
Focus on sustainability
Sustainable investing was also a recurring theme throughout the day. We had an important discussion about how climate change is affecting corporations around the world. Countries are working on new regulations – more than 1,500 climate-change policies and laws are in place worldwide – which will have a profound impact on companies and investors. Social awareness of environmental issues is also rising rapidly. We believe climate change will continue to gain traction among investors – many of whom are already factoring climate risk into their portfolios.
ESG investing is a major focus for AllianzGI, and our ability to offer new strategies and capabilities has evolved dramatically in recent years, building on nearly 20 years of experience in this area.
A deeper dive into our Investment Forum insights
These are just a handful of highlights from a day packed with discussion and debate about a broad range of issues. Check back here on LinkedIn, follow @AllianzGI_View on Twitter or visit www.allianzgi.com as we explore the actions that investors should take in response to these insights