Investment Strategy  

12/05/2017

Post-populist Europe on the edge of an economic turning point

ISBMacron_Intranet-M.jpg

By electing Emmanuel Macron, the French people affirmed their faith in European integration, and cleared the way for the continent’s policymakers to get back to the business of growth, writes Stephane Monier, Chief Investment Officer Lombard Odier, and Samy Chaar, Chief Economist Lombard Odier.
 

While the market has, in recent months, been blindsided by politics, the region’s recovery has quietly entered a new phase of economic confidence that suggests it can soon stand on its own two feet without the crutch of central-bank support. As a result, we believe that investors should now begin considering how they might position their portfolios for the end of negative interest rates.

As the continent progressively puts the eurosceptic threat behind it, existential concerns surrounding the future of the single currency, and the union as a whole, continue to be priced out of markets – leaving fundamentals with the room to reassert themselves, and uncovering a landscape of opportunity for investors.

In the run-up to France’s vote, European stocks underperformed the wider market and remain attractively priced after touching their cheapest level in five years1. This valuation dynamic is playing out against the backdrop of a Europe that is, itself, in the best economic shape it has seen in a decade, posting 14 consecutive quarters of growth, single-digit unemployment and a six-year high in economic confidence2. Meanwhile, with inflation appearing to be on the rise, European Central Bank (ECB) president Mario Draghi recently said there was no longer a “sense of urgency” in monetary policy – a statement that prompted gains in the single currency and set the stage for a new policy era that will ultimately be good for regional assets.

Towards the end of negative interest rates
With a combination of solid, diversified economic performance and improving market sentiment, Europe’s monetary policy framework is evolving. The ECB is shifting its rhetoric from “how to fight deflation” to “how and when to remove unorthodox accommodation”. With the last round of negative-rate TLTROs3 now concluded, the pertinence of negative deposit rates may soon be called into question. It is now, in our view, merely a matter of timing.

Based on the current rhetoric, it does not appear that the ECB is poised to raise rates quickly. We estimate that the unwinding process will be undertaken over a period of two years. While we expect the withdrawal of some accommodation this year, we are unlikely to see interest rates move into positive territory until the end of 2018. Either way, we hope the ECB will learn lessons from its US counterpart.

Lessons from the Fed
While the ECB has a three- to four-year time lag on the US Federal Reserve, it faces a much more complicated route to normalisation. The Fed, after all, never drove rates into negative territory and had a well-defined tightening sequence in mind: taper asset purchases first and only start to raise the policy rate after QE had concluded – with the final goal of shrinking the balance sheet. For Europe, concerns regarding the effects of negative deposit rates on the banking system may justify ending the negative interest rate policy before fully tapering the asset purchase programme.

That said, even with its well-defined process, the Fed’s first suggestion of tapering triggered a tantrum of volatility in 2013 that the ECB will want to avoid. More realistically, however, moving from a negative to a positive rate environment is unlikely to be a painless process. Choosing an opportune time to begin unwinding support remains one of the biggest balancing acts in monetary policy. Consequently, as Europe comes out of this period of political uncertainty, investors must brace themselves for some policy uncertainty in the months ahead.

…A final note on France
After the fanfare of his inauguration, Emmanuel Macron will have sat down to an in-tray of much-needed fiscal reforms, employment laws that are unfit for purpose, and pressure to drive greater EU integration. While we do not doubt his commitment to reform, we remain vigilant against a political surprise – be it positive or negative – as he complies a cabinet of enough political colours to garner him sufficient support at parliamentary elections in June.

As France’s youngest-ever leader, Macron could stand as a beacon for change in a country that greatly needs it. Alternatively, he could prove to be a mere sapling with the potential to be quashed by the forces of France’s status quo. Either way, he faces a tough challenge in steering one of the union’s largest economies out of a spiral of high unemployment and sluggish growth.

Ultimately, we see France as central to the European recovery story. As the momentum of populism fades, Macron and his counterparts across the continent must address the economic challenges that brought populism to their doorstep in the first place. In doing so, they will fashion a more enduring recovery, which will benefit France in the same way that an economically stronger France will, in turn, benefit the union.

While our positive stance on European assets holds strong – on grounds of valuation and fundamentals – we are closely watching the progress of Macron’s reforms as Europe begins the process of turning this very tight economic corner.


Relative to US equities as measured by the S&P 500 (based on expected earnings for the next 12 months). Source: Bloomberg as at April 2017.
2 Source: Bloomberg, May 2017.
3 Targeted long-term refinancing operations.

Important information

This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier. Accordingly, it has not been in accordance with the Swiss Bankers Association Directives on the Independence of Financial Research or any other legal requirements designed to promote the independence of investment research. Any information contained in this document is not and should not be regarded as financial research for the purposes of the Swiss Bankers Association or any relevant regulatory body. Consequently, this document is not subject to any restriction on dealing head of the dissemination of investment research. Furthermore it is duly stressed that opinions expressed in this document may differ from the opinions expressed by other divisions of Lombard Odier, including its Financial Research Department. This document is provided for information purposes only. It does not constitute an offer or a recommendation to subscribe to, purchase, sell or hold any security or financial instrument.

It contains the opinions of Lombard Odier, as at the date of issue. These opinions and the information contained herein do not take into account an individual’s specific circumstances, objectives, or needs. No representation is made that any investment or strategy is suitable or appropriate to individual circumstances or that any investment or strategy constitutes a personal recommendation to any investor. Each investor must make his/her own independent decisions regarding any securities or financial instruments mentioned herein. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Lombard Odier does not provide tax advice. Therefore you must verify the above and all other information provided in the document or otherwise review it with your external tax advisors.

Investments are subject to a variety of risks. Before entering into any transaction, an investor should consult his/her investment advisor and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. The information and analysis contained herein are based on sources considered to be reliable. However, Lombard Odier does not guarantee the timeliness, accuracy, or completeness of the information contained in this document, nor does it accept any liability for any loss or damage resulting from its use. All information and opinions as well as the prices, market valuations and calculations indicated herein may change without notice.

Past performance is no guarantee of current or future returns, and the investor may receive back less than he/she invested. The investments mentioned in this document may carry risks that are difficult to quantify and integrate into an investment assessment. In general, products such as equities, bonds, securities lending, forex, or money market instruments bear risks, which are higher in the case of derivative, structured, and private equity products; these are aimed solely at investors who are able to understand their nature and characteristics and to bear their associated risks. On request, Lombard Odier will be pleased to provide investors with more detailed information concerning risks associated with given instruments.

The value of any investment in a currency other than the base currency of a portfolio is subject to the foreign exchange rates. These rates may fluctuate and adversely affect the value of the investment when it is realised and converted back into the investor’s base currency. The liquidity of an investment is subject to supply and demand. Some products may not have a well-established secondary market or in extreme market conditions may be difficult to value, resulting in price volatility and making it difficult to obtain a price to dispose of the asset.

If opinions from financial analysts are contained herein, such analysts attest that all of the opinions expressed accurately reflect their personal views about any given instruments. In order to ensure their independence, financial analysts are expressly prohibited from owning any securities that belong to the research universe they cover. Lombard Odier may hold positions in securities as referred to in this document for and on behalf of its clients and/or such securities may be included in the portfolios of investment funds as managed by Lombard Odier or affiliated Group companies.

European Union Members: This document has been approved for use by Lombard Odier (Europe) S.A., a credit institution authorised and regulated by the Commission de Surveillance du Secteur Financier (CSSF) in Luxembourg and by each of its branches operating in the following territories: Belgium: Lombard Odier (Europe) S.A. Luxembourg • Belgium branch, a credit institution supervised in Belgium by the Banque nationale de Belgique (BNB) and the Financial Services and Markets Authority (FSMA); France: Lombard Odier (Europe) S.A.• Succursale en France, a credit institution supervised in France by the Autorité de contrôle prudentiel et de résolution (ACPR) and by the Autorité des marchés financiers (AMF) in respect of its investment services activities; Italy: Lombard Odier (Europe) S.A. • Italian Branch, credit institution governed in Italy by the Italian stock market regulator (Commissione Nazionale per la Società e la Borsa , or CONSOB) and the Bank of Italy; Netherlands: Lombard Odier (Europe) S.A. • Netherlands Branch, a credit institution supervised in the Netherlands by De Nederlandsche Bank (DNB) and by Autoriteit Financiële Markten (AFM); Spain: Lombard Odier (Europe) S.A. • Sucursal en España, a credit institution supervised in Spain by the Banco de España and the Comisión Nacional del Mercado de Valores (CNMV); and United Kingdom: Lombard Odier (Europe) S.A. • UK Branch, a credit institution in the UKsubject to limited regulation in the UK by the Financial Conduct Authority (‘FCA’) and the Prudential Regulation Authority (‘PRA’). Details of the extent of our authorisation and regulation by the PRA and regulation by the FCA are available from us on request. UK regulation for the protection of retail clients in the UK and the compensation available under the UK Financial Services Compensation Scheme does not apply in respect of any investment or services provided by an overseas person.

In addition, this document has also been approved for use by the following entities domiciled within the European Union: Gibraltar: Lombard Odier & Cie (Gibraltar) Limited, a firm which is authorised and regulated by the Financial Services Commission, Gibraltar (FSC) to conduct banking and investment services business; Spain: Lombard Odier Gestión (España) S.G.I.I.C., S.A.U., an investment management Company authorised and regulated by the Comisión Nacional del Mercado de Valores (CNMV).

Switzerland: This document has been approved for issue in Switzerland by Bank Lombard Odier & Co Ltd Geneva, a bank and securities dealer authorized and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

United States: Neither this document nor any copy thereof may be sent, taken into, or distributed in the United States of America, any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States Person. For this purpose, the term “United States Person” shall mean any citizen, national or resident of the United States of America, partnership organized or existing in any state, territory or possession of the United States of America, a corporation organized under the laws of the United States or of any state, territory or possession thereof, or any estate or trust that is subject to United States Federal income tax regardless of the source of its income.

This document may not be reproduced (in whole or in part), transmitted, modified, or used for any public or commercial purpose without the prior written permission of Lombard Odier. 

News

La vigueur de l’euro devrait encore durer

Thought leadership

16/08/2017

Well-designed wealth – Life insurance

Thought leadership

31/07/2017

Emerging Markets - China spreading its influence

Quarterly Investment Strategy

20/07/2017

Japan - As good as it gets

Quarterly Investment Strategy

19/07/2017

Rethinking family governance

Thought leadership

18/07/2017

Europe - Euroscepticism losing ground

Quarterly Investment Strategy

17/07/2017

France Embraces Digital Revolution

Thought leadership

13/07/2017

United States - Neither inflation, nor recession

Quarterly Investment Strategy

12/07/2017

Mid-year review: so far, so good

Quarterly Investment Strategy

10/07/2017

Q3 2017 Investment Outlook

Q3 2017 Investment Outlook

Investment Strategy Podcast

06/07/2017

RETHINK EVERYTHING

Thought leadership

28/06/2017

Les philanthropes, la finance et la cité

Thought leadership

20/06/2017

RETHINKING EDUCATION

Thought leadership

15/06/2017

RETHINKING HEALTHCARE

Thought leadership

31/05/2017

Rethink Fixed Income with Climate Bonds

Thought leadership

29/05/2017

Rethinking “Next-Gen” Philanthropy

Thought leadership

24/05/2017

Gestion des fondations en transformation

Thought leadership

23/05/2017

The 100% Impact Investor

Thought leadership

19/05/2017

Asset Allocation – Keep looking on the bright side

Quarterly Investment Strategy

18/05/2017

China to take control of Asian trade

Investment Strategy

11/05/2017

French Elections Investment Strategy

French Elections Investment Strategy

Investment Strategy Podcast

10/05/2017

French presidential elections

Investment Strategy

08/05/2017

Hedge funds and rising interest rates

Investment Strategy

01/05/2017

French Elections

French Elections

Investment Strategy Podcast

25/04/2017

French Presidential Elections

Investment Strategy

24/04/2017

Japan: The longevity issue

Quarterly Investment Strategy

24/04/2017

Europe: Towards the end of negative rates?

Quarterly Investment Strategy

21/04/2017

Le Pen, Frexit and the future of the EU

Investment Strategy

10/04/2017

Q2 2017 Investment Outlook

Q2 2017 Investment Outlook

Investment Strategy Podcast

03/04/2017

Le franc, refuge des élections en Europe

Thought leadership

16/03/2017

Rethinking sustainable cities with Monocle

Rethink everything

24/02/2017

Brexit: Surviving outside the single market?

Investment Strategy

19/01/2017

Japan: an accidental winner?

Quarterly Investment Strategy

29/12/2016

Emerging markets: Recovery still in its early innings

Quarterly Investment Strategy

28/12/2016

Europe: Still much political risk on the horizon

Quarterly Investment Strategy

23/12/2016

United States: a tired economy about to get a vitamin boost

Quarterly Investment Strategy

22/12/2016

Investment outlook 2017

Investment outlook 2017

Investment Strategy Podcast

19/12/2016

OPEC rises from the ashes

OPEC rises from the ashes

Investment Strategy Podcast

04/12/2016

Diabetes : a game-changing technology

Numeric health

18/11/2016

Post-US election investment outlook update

Post-US election investment outlook update

Investment strategy podcast

16/11/2016

Positioning portfolios for President Trump

Positioning portfolios for President Trump

Investment strategy podcast

10/11/2016

Donald Trump elected President

Investment Strategy

09/11/2016

US election update

US election update

Investment Strategy Podcast

24/10/2016

Q4 2016 Investment Outlook

Q4 2016 Investment Outlook

Investment Strategy Podcast

21/10/2016

United States: Will policy support prolong the expansion?

Quarterly Investment Strategy

21/10/2016

Japan: Alone at the forefront

Quarterly Investment Strategy

19/10/2016

US presidential election: potential market impacts

Investment strategy bulletin

12/10/2016

A politically heated final quarter

Quarterly Investment Strategy

07/10/2016

The metamorphosis of philanthropy

Philanthropy

20/09/2016

US elections 2016: more status quo than system reboot

Investment strategy bulletin

16/09/2016

ASIAN PERSPECTIVES ON ENTREPRENEURSHIP

Entrepreneurship

25/08/2016

RETURN OF THE ‘NOTORIOUS BoJ’

Investment strategy Asia

09/08/2016

CAN GOLD REALLY ACT AS A HEDGE?

Investment Strategy Bulletin

22/07/2016

WHERE ART AND INSPIRATION MEET

Partnership

19/07/2016

POLITICAL RISKS AND ECONOMIC COUNTERFORCES

Quarterly Investment Strategy

14/07/2016

Q3 2016 INVESTMENT OUTLOOK

Q3 2016 INVESTMENT OUTLOOK

Investment Strategy Podcast

13/07/2016

POSITIONING FOR BREXIT: WHAT NEXT FOR THE BANKS?

Sector update - Brexit

04/07/2016

BREXIT: MAJOR CENTRAL BANKS EXPECTED TO ACT

Investment Strategy

24/06/2016

COULD MONEY FLY?

Investment Strategy Bulletin

01/06/2016

HAPPY ANNIVERSARY UAE

Corporate

09/05/2016

EMERGING MARKETS: AN UNEXPECTED PERIOD OF PEACE

Quarterly Investment Strategy

04/05/2016

INVESTMENT OUTLOOK

INVESTMENT OUTLOOK

Investment Strategy Podcast

29/04/2016

JAPAN: IN SEARCH OF A VIRTUOUS CYCLE

Quarterly Investment Strategy

28/04/2016

EUROPE: NO SIGN OF A CREDIT BINGE

Quarterly Investment Strategy

25/04/2016

THE US ECONOMY (READ: CONSUMER) STILL HAS STAMINA

Quarterly Investment Strategy

21/04/2016

THE END OF THE CREDIT CYCLE

Fixed income monthly

19/04/2016

A SWISS PERSPECTIVE ON BREXIT: PART II

Investment Strategy Bulletin

18/04/2016

MARKET OUTLOOK: LOW, SLOW AND STABLE

Quarterly Investment Strategy

15/04/2016

A SWISS PERSPECTIVE ON BREXIT

Investment Strategy Bulletin

13/04/2016

ASSET ALLOCATION: INVESTING BEYOND THE PANIC

Quarterly Investment Strategy

12/04/2016

SWISS FINTECH INNOVATION

Association

31/03/2016

UNTAPPING LATAM’S POTENTIAL

Investment strategy

23/03/2016

EN ROUTE TO NEGATIVE RATES

Investment strategy

24/02/2016

COMMITTED TO INDEPENDENT ASSET MANAGEMENT

Strategy bulletin

23/02/2016

THE ART OF MEASURING IMPACT

Investment strategy

28/01/2016

Q1 2016 INVESTMENT OUTLOOK

Q1 2016 INVESTMENT OUTLOOK

Investment Strategy Podcast

19/01/2016

QUARTERLY INVESTMENT STRATEGY: JAPAN OUTLOOK

Investment strategy

21/12/2015

QUARTERLY INVESTMENT STRATEGY: US OUTLOOK

Investment strategy

18/12/2015

HAS RUSSIA SEEN THE WORST ?

Strategy Bulletin

03/11/2015

HOW WORRIED SHOULD WE BE ABOUT BRAZIL?

Strategy Bulletin

12/10/2015

ADAPTING TO LOWER-FOR-LONGER OIL PRICES

Strategy Bulletin

06/10/2015

INVESTING FOR A "GOLDEN AGE"

Strategy Bulletin

28/09/2015

Expert view: The Fed holds its fire, again

Expert view: The Fed holds its fire, again

Investment Strategy Podcast

18/09/2015

FED IN FOCUS

Strategy Bulletin

30/07/2015

Q3 Investment Outlook from our European bank

Q3 Investment Outlook from our European bank

Investment Strategy Podcast

15/07/2015

GREECE: AFTER THE REFERENDUM

Strategy Bulletin

06/07/2015

TIME TO RE-VISIT EMERGING MARKETS?

Strategy Bulletin

03/07/2015

Expert view: What should you do with your cash holdings?

Expert view: What should you do with your cash holdings?

Investment Strategy Podcast

26/06/2015

OIL UPSIDE IS CAPPED

Strategy Bulletin

28/05/2015

Opportunities and risks in global markets

Opportunities and risks in global markets

Investment Strategy Podcast

19/05/2015

Our Q&A on Greece

Strategy Bulletin

17/02/2015

Economic outlook 2015

Strategy Bulletin

17/12/2014

LOWER OIL PRICES:GOOD NEWS, OR BAD?

Strategy Bulletin

01/12/2014

ROUGH TIMES FOR SOUTH AMERICA

Strategy Bulletin

03/11/2014

WHY COMMODITIES ARE BACK IN FOCUS

Strategy Bulletin

05/08/2014

WILL THE SNB HAVE TO FOLLOW THE ECB?

Strategy Bulletin

20/06/2014

EMERGING MARKETS: TIME TO DIFFERENTIATE

Strategy Bulletin

16/05/2014

CHINA’S DELEVERAGING STRATEGY

Strategy Bulletin

24/04/2014

ABENOMICS. THE EASY PART IS OVER

Strategy Bulletin

18/03/2014

WHAT ARE THE ECB’S OPTIONS?

Strategy Bulletin

13/02/2014

LOWER CHINESE GROWTH AND OPPORTUNITIES

Strategy Bulletin

21/01/2014