Why Investors Should Pay Attention to the European Elections

The
Rise
of
The
Right

The
polls
are
fairly
unanimous:
the
parties
on
the
centre-right
(i.e.
the
European
People’s
Party,
or
EPP)
are
likely
to
gain
more
seats
and
influence
than
ever
before,
and
will
probably
be
clear
winners
in
several
EU
member
states,
including
France,
Italy,
Hungary,
Austria
and
the
Netherlands.
The
Greens
and
Liberals
are
expected
to
lose
seats.
As
a
result,
the
next
European
Parliament
will
be
more
polarised
and
fragmented
than
ever
before.

“Although
we
believe
the
centrists
will
still
be
able
to
maintain
an
overall
majority,
it
cannot
be
ruled
out
that
the
EPP
could
also
build
a
majority
with
the
far
right,
which
would
give
it
significant
influence
when
it
comes
to
issues
such
as
immigration,
climate
and
further
EU
integration,”
says
Nicolas
Wylenzek,
macro
strategist
at
Wellington
Management.

“How
this
potential
rearrangement
will
alter
EU
policy
will
depend
on
a
number
of
factors,
including
the
composition
of
the
European
Commission,
changes
in
the
political
landscape
at
member
state
level,
and
international
developments
such
as
the
war
in
Ukraine
and
the
US
elections.”

Despite
the
uncertainty,
several
longer-term
political
themes
are
obvious,
and
the
Wellington
strategist
identifies
five
in
particular:

‘Less
Green’

Some
segments
of
the
electorate
feel
climate
measures
have
gone
too
far,
and
even
more
so
now
the
energy
price
crisis
has
abated.
The
EU
will
maintain
its
focus
on
energy
independence,
but
will
slow
its
progression
to
net-zero.
Moreover,
some
long-term
initiatives
–
e.g.
green
hydrogen
production –
may
lose
momentum.

‘Less
EU
Integration’

Increasing
support
for
extremist
parties
suggests
a
growing
loss
of
trust
in
government
institutions.
These
voters
also
feel
EU
integration
is
moving
too
fast,
which
means
certain
projects,
such
as
a
capital
markets
union,
could
slow
further.
New
proposals
like
the
common
defence
fund
may
struggle
to
gain
momentum.

‘Less
Immigration’

New
laws
have
recently
made
it
harder
for
asylum
seekers
to
enter
the
EU,
but
the
significant
success
of
the
far
right
could
push
the
political
dial
further
to
the
extreme.
Such
a
move
could
further
restrict
an
already-rigid
labour
market.

‘More
Business’

A
common
criticism
of
the
European
Parliament
is
it
is
too
focused
on
regulation
to
the
detriment
of
business.
We
might
see
efforts
to
reduce
some
measures,
especially
in
key
areas
of
national
security
and
supply
chain
resilience.
This
could
include
semiconductors
and
critical
minerals.
We
may
also
see
a
more
permanent
easing
of
state
aid
rules.

‘More
China?’

The
next
European
Parliament
could
also
become
progressively
more
favourable
to
China
if
the
far-right
parties
perform
well.
After
the
invasion
of
Ukraine,
parts
of
the
European
far-right
shifted
their
support
from
Russia
to
China.
An
increasingly
pro-Beijing
parliament
could
complicate
relations
between
the
EU
and
the
US,
which
continues
to
push
for
decoupling.

There
are
two
potential
consequences
here.
On
the
one
hand,
a
reduction
of
administrative
burdens
could
be
beneficial
for
EU
companies.
On
the
other,
reforms
that
foster
further
integration,
such
as
the
banking
union
and
capital
market
union,
would
strengthen
the
resilience
of
the
European
economy
and
facilitate
growth.

All
Eyes
on
Defence

Where
energy
transition
was
once
the

phrase
du
jour,
common
defence
is
now
critical.
EU
member
states
want
to
work
more
closely
on
large-scale
development
projects
such
as
next-generation
tanks
and
fighter
jets,
and
strengthening
the
European
defence
industry
to
reduce
import
dependency.

“We
see
this
growing
boost
in
European
defence
spending
as
a
clear
benefit
for
European
defence
companies,
which
will
benefit
from
both
a
strong
tailwind
and
better
visibility
on
demand
in
the
medium
term,”
Wylenzek
says.

“Moreover,
unlike
suppliers
involved
in
the
energy
transition,
defence
contractors
are
protected
by
much
higher
barriers
to
entry.
Although
valuations
have
risen
significantly,
we
believe
that
selected
stocks
remain
attractive
from
a
long-term
perspective.”

Why
Are
European
Equities
on
the
Upswing?

As
all
this
unfolds,
European
equity
markets
are
doing
well.
Having
started
2024
on
a
strong
note,
the
Morningstar
Europe
Index
has
gained
10.7%
since
the
start
of
January.

Regardless
of
the
composition
of
the
new
Parliament,
“the
Mid-Term
Review
of
the
Next
Generation
EU
has
been
successful
and
we
are,
according
to
the
Commission,
about
to
enjoy
the
maximum
macroeconomic
impact
of
the
plan’s
investments.”
So
says Alessandro
Tentori,
chief
investment
officer
for
Europe
at
AXA
Investment
Management.

“Consumption
is
recovering
in
Europe,
the
energy
shock
is
receding
and
we
are
forgetting
about
it,”
says
Niall
Gallagher,
investment
director,
equity
Europe
at
GAM.

“We
believe
inflation
will
come
down
a
bit
more,
however
it
will
remain
higher
than
before
and
also
more
volatile,
although
not
to
the
levels
of
the
last
two
years.
In
our
view,
this
will
allow
real
wages
to
rise
and
this
will
also
have
positive
effects
on
consumption.”

However,
the
manager
warns
some
areas
of
the
market
are
currently
overvalued –
especially
growth
stocks.
Valuations
have
risen
again
as
the
market
has
started
to
discount
the
decline
in
interest
rates.

“If
rates
don’t
fall,
or
if
they
don’t
fall
as
quickly
as
investors
expect,
we
believe
that
there
are
some
growth
stocks
in
Europe
that
could
be
affected
by
the
compression
of
valuations,”
Gallagher
says.

“We
therefore
need
to
pay
attention
to
that
risk.”

“Overall,
despite
the
evolving
political
landscape,
which
we
view
as
marginally
negative,
we
remain
positive
on
European
equities,
given
the
improving
growth
environment
and
strong
fiscal
support,
with
a
preference
for
European
banks
and
domestic
consumer
beneficiaries
such
as
the
travel
and
leisure
sector,”
Wylenzek
adds.

“We
favour
defence
from
a
cyclical
point
of
view
and
healthcare,
telecom
and
utilities
from
a
more
defensive
point
of
view.

“More
broadly,
the
recent
strong
performance
of
European
equity
markets,
excluding
the
UK,
suggests
that
global
investors
have
started
to
re-pricing
European
equities
in
the
wake
of
Europe’s
burgeoning
growth
recovery
and
US
market
concentration
risk.We
believe
this
trend
is
still
ongoing.”

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