For some time we have been investing on the basis that European economies have been and are likely to see low rates of economic growth. It is now clear that in addition to that difficulty, the inability of European political leaders to have a decisive and unified approach to the economic challenges creates an additional headwind. It seems that domestic political agendas usually revolve around figuring a way to get re-elected at the next term (5-6 years away), rather than leaving a lasting legacy for the next generation. One challenge here is that no European politician is elected with a Pan-European mandate creating a natural mismatch between their platform and the role they’ve been cast in to, i.e. saving Europe.
While this can have a detrimental effect on many companies, there are equally a number of companies that are doing their best to expand their operations in faster growing economies or sectors, and above all to be independent from government influence as far as possible. The weakness of many of Europe’s utility companies for example has in large part been caused by tighter regulation - a factor that has also affected telecom companies. At the same time, Nokia’s woes have nothing to do with a poor political environment, just as the success of Inditex (clothes retailer including the Zara brand) is due to great products and efficient sourcing.
It would be helpful to think that politics is becoming less relevant, as the economic policies followed by a developed economy have to follow an increasingly narrow path. I do wonder whether anyone has written a book - “A Simple Guide on how to run a modern economy” - and any political party can only interpret the rules within a narrow margin. In Europe, the nuance is shifting to growth but with a clear reiteration that debt must be kept under control. But equally there are different emphases that can be put on running an economy, and it is significant that Europe began to say “growth” is the focus in preference to “austerity” in January this year, when former president Nicolas Sarkozy had a summit meeting with Chancellor Angela Merkel: they know that growth is required, but they are equally (as is UK Prime Minister David Cameron) starkly aware of the danger of “borrowing your way to growth”.
So what can a successful company do? Many of our holdings achieve growth due to the demographic effects - Fresenius on the growing need for healthcare provision, and Essilor from the need to help a growing population see clearly with their glasses - old and young. L’Oreal is finding growth from emerging markets and also better demand in established markets. Deutsche Post DHL is finding growth from helping companies run their logistics more effectively - a “win win” situation. Too often the obsession with the growth in GDP masks underlying change, hence our attempt to find investments in companies that can be “part of the solution.”
As we wrestle with a frustratingly slow and lingering political and economic impasse in Europe, we need to remember that the companies in which we are investing are every bit as well informed as we are, and in touch with the real world. They can see the order flows very quickly, and we need to recognise when and where, and to what extent expectations may change.
A company may well be influenced by the economic backdrop, but politics ultimately revolves around a fairly narrow path. But as Repsol found to its cost when the Argentinean government nationalised YPF, and as oil companies have found in Venezuela, the difficulty is often in younger emerging markets. Europe has plenty of challenges ahead, and higher taxation may well become an issue at some stage, but politics can have a far smaller effect in Europe than markets have feared recently. The growth in extreme parties (left or right) in Europe over the last twelve months should be seen in the context of intense anger at the mismanagement of economics by recent administrations. That is already leading to more positive approach being taken to proactive management of Euro related problems, and just like the joke about the person who is lost being advised “not to start from here”, the fact is that the Euro is in place and those structures that should have been in place before launch must now be put in place.
If Greece leaves the Euro (I do not think anyone is bluffing in this debate), the immediate impact is estimated by Citi analysts to be about 3% of Eurozone GDP, but the relief felt by having a solution is likely to more than outweigh that impact. Any exit by Greece will be met with greater confidence in finding a lasting solution to the whole Euro issue, as closer fiscal integration will follow immediately. Politics will then have to comply with the “how to run a modern economy” handbook regardless of individual political agendas.
Tim Stevenson is Henderson Global Investors Pan European fund manager. Henderson Global Investors is represented in Israel by Meitav Investment House.
Published by Globes [online], Israel business news - www.globes-online.com - on June 12, 2012
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