PNC’s European Vacation

It is not often that multiple events take the markets by surprise the way the one-two punch of Brexit and the U.S. election outcome in 2016 did. The short-term impact was a sharp drop, although the markets quickly recovered and even went on to exceed previous highs. December 2016 managed to squeeze one last unanticipated event in for the year with the referendum in Italy resulting in the resignation of Prime Minister Matteo Renzi.

Italian Power Shift

The Prime Minister’s resignation reflects the decline in power of the ruling Democratic Party and the ascension of M5S (Five-Star Movement) in popularity. The outcome of the next general election, which must take place by May 20, 2018, but could occur in 2017, could increase the potential for Italy to leave the European Union (EU) if the anti-establishment M5S does gain in power. Several other key general elections and presidential votes in 2017 and 2018 could pave the way for further populist moves in other countries.

UK or Another Way?

While the United Kingdom’s (UK) decision to leave the EU can be seen as a clear manifestation of growing populist sentiment globally, views and leanings vary considerably by country. In Austria, for example, the far-right Freedom Party candidate, Norbert Hofer, was resoundingly defeated by the more liberal Alexander Van der Bellen, running as an independent, but formerly of the Green Alternative Party. As elections and other key decisions take place in 2017, results could substantially impact the stability of the EU. While some of the smaller, more economically troubled countries may have populist views and dislike the necessity for “handouts” in the form of financial aid, they likely cannot afford to break with the EU.

France and Germany May Signal Moderation

The May 7th presidential election results in France may be an indicator of more moderate political winds blowing in the EU, even despite rising terrorism and immigration concerns. The runoff election pitted centrist Emmanuel Macron of the party which he founded, En Marche!, against Marine Le Pen, of the far right National Front, which was co-founded by her father Jean-Marie Le Pen in 1972. The decisive victory of Macron, with 66.1% of the vote does help to allay fears of a wholesale defection from the EU. In Germany, unexpected victories by the reigning party, the Christian Democratic Union, over the Social Democrats in the states of Saarland and Schleswig-Holstein, may serve as an early indication that Angela Merkel’s reelection bid will be successful. This is particularly significant, as Germany continues to dominate the Eurozone economically. Regardless of recent outcomes, however, we do not believe that populist sentiment is likely to disappear.

Muted, Yet Continued Eurozone Recovery

In our opinion, the Eurozone is still in a strengthening phase, albeit at a somewhat uneven tempo. We see several positive indicators that support this:

  • Acceleration in real GDP, which has exceeded the rate of growth in the U.S. and Japan over the past several years
  • The Purchasing Manager Index, a sign of economic condition, which has been sluggish in recent years, is currently well above benchmark 50 level, indicating expansion
  • Growth in employment, with quarterly employment numbers at near-record highs and unemployment down significantly from Great Recession, which were above 12% levels
  • Bond yields are down, reflecting lower perceived risk than during the sovereign debt crisis
  • The German stock exchange, the DAX, is up almost 10% year to date as of late May 2017, much of the advance taking place since mid-April

Potential Obstacles to Growth Ahead

While the conclusion of the French and German elections are signs of growth ahead, other countries are still experiencing their own drama. Greece seems to be a never-ending saga, back in the news again with its ongoing inability to meet debt payments. The next payment is due in July, and the International Monetary Fund and the Eurozone are struggling to reach a deal to extend additional funds to Greece. The IMF may be feeling that it has already done more than its share to bail Greece out. If a deal is not struck, market volatility is likely. Lastly, the UK, as it navigates its way through Brexit, is another question mark. Prior to the Brexit vote, the UK was one of the stronger EU countries, with the likelihood that the Bank of England would even raise interest rates given growth prospects. The dire predictions of the immediate post-vote environment have eased, although the pound remains weaker.

What Lies Ahead for Investors?

There are clearly some challenges ahead for the Eurozone with conflicting signals and slow growth, especially vulnerable to unfolding political and economic circumstances that can magnify the impact of more economically hampered members. Overall, however, we are encouraged by positive signs of growth and consumer confidence. European corporate earnings have improved. A stronger U.S. dollar should benefit non-U.S. developed world stocks, making their goods cheaper to the American market. Finally, if needed, the European Central Bank has demonstrated its willingness to step in with fiscal stimulus. We are keeping a close eye on developments in Europe and elsewhere globally and maintain a tactical foreign-exchange hedged allocation to European equities. Our goal is to help our investors benefit from exposure to non-U.S. markets, while reducing currency risk.

The Right Advisor At the Right Time

Enjoy access to a team of experienced financial professionals with specialized knowledge to help you meet your financial needs.

Explore PNC Wealth Management »


 

Important Legal Disclosures and Information

The material presented in this article is of a general nature and does not constitute the provision by PNC of investment, legal, tax, or accounting advice to any person, or a recommendation to buy or sell any security or adopt any investment strategy. Opinions expressed herein are subject to change without notice. The information was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy. You should seek the advice of an investment professional to tailor a financial plan to your particular needs. For more information, please contact PNC at 1-888-762-6226.


The material presented in this article is of a general nature and does not constitute the provision by PNC of investment, legal, tax, or accounting advice to any person, or a recommendation to buy or sell any security or adopt any investment strategy. Opinions expressed herein are subject to change without notice. The information was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy. You should seek the advice of an investment professional to tailor a financial plan to your particular needs. For more information, please contact PNC at 1-888-762-6226.

The PNC Financial Services Group, Inc. (“PNC”) uses the marketing names PNC Wealth Management® and Hawthorn, PNC Family Wealth® to provide investment, wealth management, and fiduciary services through its subsidiary, PNC Bank, National Association (“PNC Bank”), which is a Member FDIC, and to provide specific fiduciary and agency services through its subsidiary, PNC Delaware Trust Company or PNC Ohio Trust Company. PNC also uses the marketing names PNC Institutional Asset Management®, PNC Retirement Solutions®, Vested Interest®, and PNC Institutional Advisory Solutions® for the various discretionary and non-discretionary institutional investment activities conducted through PNC Bank and through PNC’s subsidiary PNC Capital Advisors, LLC, a registered investment adviser (“PNC Capital Advisors”). Standalone custody, escrow, and directed trustee services; FDIC-insured banking products and services; and lending of funds are also provided through PNC Bank. Securities products, brokerage services, and managed account advisory services are offered by PNC Investments LLC, a registered broker-dealer and a registered investment adviser and member of FINRA and SIPC. Insurance products may be provided through PNC Insurance Services, LLC, a licensed insurance agency affiliate of PNC, or through licensed insurance agencies that are not affiliated with PNC; in either case a licensed insurance affiliate may receive compensation if you choose to purchase insurance through these programs. A decision to purchase insurance will not affect the cost or availability of other products or services from PNC or its affiliates. PNC does not provide legal, tax, or accounting advice unless, with respect to tax advice, PNC Bank has entered into a written tax services agreement. PNC does not provide services in any jurisdiction in which it is not authorized to conduct business. PNC Bank is not registered as a municipal advisor under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Act”). Investment management and related products and services provided to a “municipal entity” or “obligated person” regarding “proceeds of municipal securities” (as such terms are defined in the Act) will be provided by PNC Capital Advisors.

“PNC Wealth Management,” “Hawthorn, PNC Family Wealth,” “Vested Interest,” “PNC Institutional Asset Management,” “PNC Retirement Solutions,” and “PNC Institutional Advisory Solutions” are registered service marks of The PNC Financial Services Group, Inc.

Investments: Not FDIC Insured. No Bank Guarantee. May Lose Value. Insurance: Not FDIC Insured. No Bank or Federal Government Guarantee. Not a Deposit. May Lose Value.