While the exact consequences of a ‘Brexit’ remain unclear, the UK’s vote to leave the European Union has undoubtedly raised the prospect of greater political unrest in wider Europe.

Right-wing parties in France, the Netherlands, Italy and beyond have seized upon the UK’s landmark vote as a chance to garner support for a similar course of action in their own countries.

Marine Le Pen, president of French far-right party Front National, tweeted on 24 June (the day of the UK’s referendum result) “Victory for Freedom! As I have been asking for years, we must now have the same referendum in France and EU countries”. Matteo Salvini, member of the European Union and leader of Italy’s Lega Nord (as well as being a big supporter of Donald Trump), echoed the sentiment: “Hurrah for the courage of free citizens. Heart, brain and pride defeated lies, threats and blackmail. THANK YOU UK, now it’s our turn”.[1]

Many others have added their voice to the cause…[2]

right wing voices image

 

However, in spite of this recent political turbulence, there are several reasons why we think Europe may offer attractive investment opportunities.

Since the financial crisis, we have seen significant divergence in the performance of US and European equities, leaving Europe trading on lower multiples. A simple comparison of the Shiller P/E ratios of the two regions over the past two decades demonstrates this well:

 

Shiller p e chart

 

In our opinion, this makes Europe look attractive from a valuation point of view. However, it’s important to bear in mind the difference in composition of the two markets; while the European equity market has a higher weighting of cyclical stocks such as banks and industrials, which can be more vulnerable in periods of uncertainty, the US market benefits from a number of large, more stable technology companies.

In addition to a lower valuation, we think Europe has a number of other things in its favour:

  1. Europe contains some of the world’s strongest brands, spanning such areas as automotive manufacturing, chocolate, renewable energy, speciality chemicals, Swiss watches, Italian leather goods and alcoholic beverages. These boast strong, defensive global presences and stand to benefit from growing markets in the Americas and Asia over the long term.
  2. Europe has a formidable history of innovation, and this shows no signs of slowing down – from the Dutch publishers which are doing pioneering work in digital data to the pharmaceutical companies at the cutting edge of new therapies.
  3. There is a chance that the shock of the UK’s vote to leave the union will galvanise support behind the EU project. The recent Spanish election gave some hope to this idea as, just a few days after the UK referendum, there was an increase in support for centre-right People’s Party and a decrease in support for far-left party Podemos. A more unified Europe would have a greater number of tools at its disposal to combat low GDP growth such as wide-ranging fiscal stimulus.

 

 

 

[1] http://www.bbc.co.uk/news/world-europe-36615879

[2] Source: Twitter, Golden Dawn: http://i-stand-with-golden-dawn.webnode.gr/news/statement-of-the-leader-of-golden-dawn-n-g-michaloliakos-about-the-result-of-the-referendum-in-great-britain/, The Guardian: https://www.theguardian.com/world/2016/jun/24/european-far-right-hails-britains-brexit-vote-marine-le-pen

 

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