Shaping a Portfolio for 2017: Europe

EU and UK

I started out to title this the EU instead of the more generic Europe.  But then I realized we have to treat the UK as a separate issue, even though it exhibits many of the same structural characteristics as the rest of Europe.  So I changed my title.

Two factors about Europe stand out to me as an investor:


–the euro, which cost $1.40 each as recently as 2014 and which went for as much as $1.15 earlier this year, is now trading at $1.04.  A pound sterling, which cost $1.71 in 2014 and $1.45 prior to the Brexit vote, now goes for $1.22.

A 26% decline in the euro vs. the US$ and a 29% fall in sterling are immense moves.  While they represent a catastrophic contraction in national wealth for the individuals and nations affected, they also act as a big boost to the global competitiveness of Europe-based multinational firms.

EU warts showing

–in June, the UK voted to leave the EU. That prompted Scotland to revive its efforts to secede from the UK and become its own (EU member) nation.  Italy, in many ways the Japan of Europe, just rejected reforms that would have put government finances on somewhat better footing and allowed it to address the problems of its woefully weak banks.  Angela Merkel, the political leader of the EU–as well as of Western democracies, many would say–appears to be in deep trouble in Germany because of her stance on immigration.  Greece continues to resist fixing its economy.  France only looks good by comparison.

My stock market experience is that, with the possible exception of Japan, politics rarely matters.  Better to focus on company by company prospects than media headlines.  However, this is a real mess.

my take

My overall economic view is that Europe is about two years behind the US in recovery from recession.  That would suggest domestic enterprises are in for another year of struggle before we see strong signs of general economic growth.  Currency weakness should strongly accelerate the pace of improvement.  The ongoing efforts of traditional political/economic elites to preserve their place of privilege without regard to the cost to their countries should retard meaningful progress.

To my mind, Europe remains a special situations market.  I think the best course for equity investors is to be underweight and play the currency rather than the economies.  That is, to remain with multinational stocks based in Europe which have significant non-European sources of revenue.  Hotel companies with US presence, and which also stand to be beneficiaries of increased tourism in a now-cheap Europe, seem to me to be particularly well-placed.






Leave a Reply

%d bloggers like this: