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Dear UK, Don’t Try To Be France. It Doesn’t Work

 4 min read / 

As one probably has heard of by now, citizens of the United Kingdom recently voted to (Br)exit the European Union – which some were never really thrilled to be part of in the first place. Despite one’s opinion of such decision, there can be nothing but respect for the right to self-determination. This is the reason why what will follow should not be seen as a critique of this choice but rather a review of the means by which the aforementioned right is exercised. In the light of recent events, such means will most likely lead to harsh terms for the UK in the Brexit deal, if any deal is reached at all.

To be honest, France as a country may not have much to do with the Brexit vote. However, French culture has more to do with Brexit than it seems – the UK has fully embraced regarding this particular matter. As much as one usually would exult at the bare thought of the UK – the soil that remained untouched by the French centuries after centuries – embracing French culture, one must admit that only sadness comes to mind regarding this issue.

One could – and probably should – wonder what French culture has to do with this matter exactly. On a more serious note, the UK, unfortunately, seems to have been inspired by the French Unions’ modus operandi. UKIP and other Leave supporters did not rip clothes off David Cameron as strikers did to Air France’s Director of Human Resources, but they might as well have had. The Leave camp organised its campaign as French Unions organise theirs: win first, think later. Guess what? Tricking voters using lies and half-truths – such as pledging £350m per week to the NHS – constitutes the simple part of the process. If being French teaches one thing, it is the following: criticising an establishment is easy, coming up with realistic and meaningful reforms? Not so much.

The Leave camp’s main challenge is not, and has never been, the vote itself but rather its aftermath. Sadly, their leaders seem not to have given a single thought to the matter. It became more evident every single day that leading politicians of the Leave campaign lacked strong convictions in the EU-membership debate and simply tried their luck in the British ‘political chessboard’. Unluckily for them, binge-watching House of Cards does not appear to be sufficient to become a talented politician. Both Boris Johnson and Nigel Farage learned this the hard way. Didn’t someone tell them that a proper captain goes down with the ship? It seems not.

Or is it the case that they not care enough about the UK to stick to that ship? In their defence, conditions are probably not as favourable to them as they had fantasised. Perhaps, the Leave campaign’s modus operandi led to nothing but a potential disaster for what citizens intended to preserve: the UK itself. The road to hell is paved with good intentions after all.

Today, the future of the UK is as uncertain as it possibly could be. As the French Economic Minister, Emmanuel Macron, stated a few weeks ago, the UK – or at least what would be left from it if Scotland or Northern Ireland decides to secede – might experience a “Guernseyfication”. Such theory implies that the UK would experience a decrease in attractiveness and therefore need to pass tax haven-like measures to draw foreign direct investment. This has been corroborated by George Osborne’s will to slash corporate tax to less than 15% to prevent companies’ departure from the UK.

In a nutshell, as French workers pay the bill when unions trigger endless strikes for petty reasons, UK citizens will foot the bill for the incompetence and cowardice of the Leave leaders. Such analysis, of course, holds only in a relatively short-term perspective. Today, Brexit’s long term consequences are utterly unthinkable. Perhaps the UK shall rise again from its ashes, as it always has.

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May Meets Macron

May Macron

The UK prime minister agreed to pay £44.5m towards tighter border security at Calais.

Editor’s Remarks: The French president arrived in the UK for the Anglo-French summit amid widespread complaints from the Tory party about just why Britain is paying another £44.5m for tighter security in France. One Tory MP pointed out that this addition brings the total figure the UK has paid to France in recent years up to £170m. France, meanwhile, says that the amount is necessary because the migrants in Calais are trying to get to the UK, who must, therefore, contribute towards their costs. The talks were also consumed by the imminent task of reaching consensus over the UK’s trade deal with the UK after Brexit goes through.

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Bayeux Tapestry on Loan

Bayeux Tapestry UK

Emmanuel Macron has offered to loan the famous tapestry to the UK in an effort to improve relations.

Editor’s Remarks: The offer is expected to be announced this Thursday, when Macron will meet UK officials at the Anglo-French summit at Sandhurst. The Bayeux Tapestry was commission by William the Conquerer’s brother to celebrate his 1066 conquest of England and depicts the Norman king defeating the Anglo-Saxon ruler King Harold. Although it was made in England, the piece – which measures about 35 square metres – has remained in France for the past 940 years. At the upcoming summit, Macron is also expected to petition the UK to join his combined European military initiative – a move many expect Britain’s new defence secretary Gavin Williamson to push back on.

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Why 2018 Will Be the Year of European Stocks

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European Stocks 2018

2017 has been an incredible year for stock markets all over the world. 2018 will probably be the same. Last year, the MSCI Europe index rose 22%, compared to 19% for the S&P 500. In my opinion, 2018 will be an even better year for European stocks.

A Favourable Political Landscape

In the last years, European stock markets have suffered because of a very uncertain political environment. After surviving a number of difficult elections in 2017, the European political landscape now looks much more favourable. While some risks remain, with a particular focus on the Italian general elections in March, the chance of results that could rattle markets is very slim, as populist parties appear to have softened their rhetoric against the single currency or abandoned the plan to leave it altogether.

Positive Economic and Monetary Environment

The European economy is growing quite strongly. Real GDP is expected to grow by 2.1% in 2018, unemployment has reached the levels of 2009 and consumer confidence is well above pre-crisis numbers. The improving economy should boost EPS, making European stocks look relatively cheap compared to bonds.

“In Europe, the combination of easy credit conditions and falling unemployment should support confidence, earnings and equities […] An incredibly tight correlation has existed throughout history whereby rising consumer confidence in the euro zone boosts equity prices, and you get this virtuous cycle. We think that will continue.” Mike Bell, JP Morgan Asset Management

In addition to a recovering economy, the European Central Bank will keep buying bonds until at least September, continuing to support markets. Recovering European companies might use this cheap debt to complete cross-border mergers and acquisitions.

The Rising Euro

2018 is likely to be the year of the Euro as well. After an incredible 2017, where the currency strengthened considerably against the US dollar, many analysts predict that the EUR/USD exchange rate will reach 1.30 – a level not seen since 2014. Some suggest that the pair will end the year at 1.24.

Source: StockCharts

Since the beginning of the year, the euro has already seen some interesting movements on the upside, thanks to Germany getting closer to a government, hawkish comments by the ECB and China suggesting that they might diversify their FX reserves. However, as a strong euro would not benefit European exporters, we can expect the ECB to act to weaken the currency, especially since inflation is expected to remain low for years.

Cyclical Sectors Look Particularly Interesting

Given the positive economic environment, cyclical stocks are attractive investments. In fact, in the first week of trading in 2018, cyclical stocks in the Stoxx 600 have performed much better than defensive ones.

“In an environment of solid growth and rising long-term yields in Europe, financials and value stocks in general are likely to outperform, as well as energy.” Valentin Bissat, Mirabaud Asset Management

Source: Bloomberg

However, UBS analysts warn that the European banking sector could suffer earnings downgrades due to risks generated by sluggish revenues, cost inflation and the threat of regulatory uncertainty. As a consequence, investments should be chosen very carefully, favouring cheaper banks with strong levels of free cash flow generation.

The Old-Economy Might Produce Healthy Returns As Well

After the financial crisis and the European sovereign-debt crisis, in old-economy industries, like building material manufacturers and homebuilders, firms have restructured their balance sheets and rationally changed their business models. As many weak companies have failed, there is less competition as well. With consumer and business confidence increasing quickly, demand for these businesses will increase as well. Those firms that have survived might even be able to raise prices, generating higher EPS.

European Stocks Are Just Cheaper than US Stocks

As said, fundamentals would justify a European equities rally in 2018. Although they are not cheap in absolute terms, they look particularly so when compared to US stocks, meaning that the Eurozone could be less vulnerable if a correction comes. In fact, the S&P 500’s forward P/E ratio is 18x, the highest since 2002, while the Stoxx 600 trades at 15x – below its 2015 peak. This same trend is confirmed by the price-to-book ratio: the Stoxx 600 trades at 2x, while the S&P 500 is trading at 3.4x – again, the highest level since 2002. The spread between the two has never been this high.

“There’s definitely less euphoria in European stocks at the moment […] Now the big question is: will European stocks be immune if there’s a correction on Wall Street?” Andrea Tueni, Saxo Banque France.

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