{"id":871,"date":"2016-07-15T07:50:14","date_gmt":"2016-07-15T07:50:14","guid":{"rendered":"https:\/\/www.antya.ca\/research\/the-european-union-where-to-from-here\/"},"modified":"2026-02-17T06:27:34","modified_gmt":"2026-02-17T06:27:34","slug":"the-european-union-where-to-from-here","status":"publish","type":"post","link":"https:\/\/www.antya.ca\/research\/the-european-union-where-to-from-here\/","title":{"rendered":"The European Union \u2013 Where To From Here?"},"content":{"rendered":"
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\nFollow Antya Investments<\/a><\/div>\n<\/p><\/div>\n<\/p><\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n
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Geo-political risks are elevated across the globe. We are increasing our allocation to Canadian assets. We see the C$ gaining strength and interest rates in Canada staying lower for longer.<\/p>\n<\/div><\/div>\n<\/div>\n

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Every now and then, investors get an opportunity to earn outsized returns in capital markets. Is Britain\u2019s recent vote to exit from Europe one such opportunity? At the heart of this conundrum is a fundamental question \u2013 will Brexit ultimately result in an unravelling of the European Union (\u201cEU\u201d)?<\/p>\n

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Brexit undoubtedly threatens European stability. Firstly, the region will probably see a break-up of United Kingdom, as Scotland looking to stay within the EU, bolts out the door. Post Brexit, Nicola Sturgeon, the leader of Scottish National Party, said that Scottish independence is \u201chighly likely\u201d to secure Scotland\u2019s place in the EU. European Commission President Jean-Claude Juncker, has said that Scotland should be able to set out its position to remain in the EU.<\/p>\n

Nonetheless, Scotland\u2019s splintering from the UK is the least of EU\u2019s problems. EU has herculean task of convincing its populace, currently reeling under Germany\u2019s painful policy of austerity, to stay united, while the far-right across the region is drumming up support for an exit.<\/p>\n

France<\/h3>\n

First up on the agenda of investors in Europe is France, where general elections are due in 2017. Francois Hollande, President of France, already called crisis meetings last month with former President Nicolas Sarkozy\u2019s conservative opposition party, the Greens, parties on the far left and centre, after Marine Le Pen, the leader of the far-right National Front party, called for a referendum on France\u2019s EU membership.<\/p>\n

Back in December 2015, Le Pen\u2019s anti-immigration party \u2013 a French counterpart of Britain\u2019s UK Independence Party that played a key role in making Brexit a reality \u2013 recorded its best local-elections result since its founding in 1972. Unfortunately for Hollande, he will be seeking re-election at a time when economic growth in France has been near-zero for many years. According to Rabobank , the French economy faces many structural challenges, including a relatively weak competitive position, high unemployment, and weaker public finances compared with\u00a0other European countries.<\/p>\n

Germany<\/h3>\n

Germany\u2019s national elections, due 2017, will queer the pitch for Chancellor Angela Merkel, who will have to perform a delicate balancing act. Merkel has to maintain equilibrium between Germany\u2019s economic relationship with the UK, and its firmness in negotiating a fair Brexit.\u00a0Any softness in Merkel\u2019s stance would infuriate the likes of Matteo Renzi, the Italian prime minister, who has been at loggerheads with the European Union over relentless pressure to abide by economic targets such as a 3 percent budget deficit \u2013 that\u2019s been a challenge for many countries such Italy, Spain and Portugal where the economies have suffered immeasurably following the global financial crisis.<\/p>\n

In fact, back in January this year, tensions between Rome and Brussels intensified after Rome blocked an EU plan to provide Turkey with \u20ac3 billion in aid, claiming that the amount earmarked for the country \u2014 approximately \u20ac300 million \u2014 should be exempted from its budget deficit. This came only a month after Renzi slammed Merkel over EU\u2019s policies on energy, banking and migration. These altercations are symptoms of Italians having a very different vision of Europe, and it\u2019s not the same as that of Merkel or even the German finance minister Wolfgang Schauble.<\/p>\n

Italy<\/h3>\n

Italy is hurting even more now, as in the aftermath of Brexit, the country\u2019s banks are under enormous pressure. But, this time around EU President Juncker was much more forthcoming. \u00a0He said the banking sector in Italy and elsewhere in Europe will be protected and that the EU will do everything to prevent a bank run. He is\u00a0concerned that Italian banks, which are saddled with \u20ac360 billion of bad loans, a third of the euro zone\u2019s total, risk attacks by hedge funds betting that Brexit turmoil could tip them into full-blown crisis.<\/p>\n

The palpable disenchantment with Europe is evident from Italian economy minister Padoan\u2019s defence of the nation\u2019s banking sector. He was quoted as saying in Ansa the EU has a \u201cdistorted perception\u201d of its banks in terms of \u2018numbers, non-performing loans and what needs capitalising,\u201d noting Brexit has affected the entire European banking system, not just Italy.<\/p>\n

Europe is therefore at crossroads, as its constituents suffer economically, and there is no clear-cut solution in sight to end their pain quickly. It remains to be seen how long will the German electorate foot the bills as economies of France, Italy, Spain, Portugal and Greece continue to struggle.<\/p>\n

It\u2019s during this bout of economic weakness and political vulnerability the far-right is showing people the exit door as a panacea for their problems. In the UK, the anti-immigration sentiment was so strong that it beat the economic rationale for staying within Europe. Could the same happen in France? It\u2019s the chorus that Europe with its obviously flawed one-size-fits-all monetary policy is a failed experiment, and it is probably time to jump off the bandwagon, is growing?<\/p>\n

That\u2019s the risk investors in European equities face, as they ponder whether the supremely-depressed Italian bank valuations represent a generational buying opportunity, or the biggest value trap of this decade?<\/p>\n

Our Takeaway<\/h3>\n

Looking at the unfolding geo-political chaos, ANTYA is increasing its benchmark weight to Canadian large capitalization equities from 20% to a range of 25%-30%. Canadian dollar will benefit from weakness in the British Pound and in the Euro, as the situation in Europe in 2017 becomes tense. A stronger dollar and a politically stable Canada is likely to attract significant capital into Canadian financial and physical assets. We have also increased our allocation to bonds, Reits and preferred equity given expectation of rates staying lower for longer.<\/p>\n

As always, elevated Canadian real estate prices, remain a question mark on continued financial stability. However, with approximately $8 trillion of global sovereign debt yielding below zero, flows into Canadian real estate in Toronto and Vancouver could accelerate even further.<\/p>\n

Therefore, to stay strong, stay diversified.<\/p>\n

Call ANTYA Today, and we can create a customised plan to suit your needs.<\/p>\n

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About the Author
\n<\/strong>Ashutosh Kumar, based in London U.K., is a highly accomplished and experienced commentator on investing. He has written extensively for Bloomberg and the Financial Times Group, as well as, worked in analytical roles with Morningstar Inc. and Standard & Poors. Ashutosh is a contributing columnist for ANTYA.\u00a0<\/em><\/p>\n

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