Europe’s economy is taking a hit from trade tensions and worries about Brexit, which is why the European Central Bank (ECB) is expected to cut rates for the first time in three years—and to restart a bond-buying program—when policy-makers meet again in September.
But Joseph Quinlan, head of chief investment office market strategy for Merrill and Bank of America Private Bank, questions the effectiveness of more easy monetary policy initiatives given borrowing costs for consumers and corporations are already dirt cheap.
Rates on government bonds throughout Europe are below zero, including the yield on Germany’s 10-year bond, which sank to 0.525% on Tuesday.
“What good is it going to do when you already have so much debt trading in negative territory?” Quinlan says.
The Missing Fiscal Stimulus
What Europe really needs and is not talking about, he says, is a fiscal stimulus plan—an influx of government spending, or tax breaks, that would spur the economy.
The problem is the European Union doesn’t have a mechanism for coordinating fiscal policy among its members. Also, individual countries, even those carrying budget and trade surpluses—which gives them flexibility to act—are unlikely to pursue these policies on their own.
“In the U.S., we’re running big deficits and debts, [whereas] in Germany, they are running huge surpluses,” Quinlan says. “They should be using that surplus to stimulate growth and infrastructure [spending], and other ways to stimulate demand.”
Despite its struggles, Europe remains crucial to the global economy, with total economic output (the making of goods and services) totaling US$18 trillion last year, according to Bank of America. Without the U.K., the EU’s output drops to US$16 million—still 20% more than China’s US$13.5 million, the firm said in an April report.
In other words, investors can’t ignore one of the world’s key sources of economic growth. But with so much uncertainty, does it make sense for wealthy investors to be invested in Europe’s stocks and bonds today? The answer is mixed.
Pharma, Travel, and Luxury
While the big picture for Europe looks bleak, Quinlan is paying attention to companies in areas of the economy that are likely to do well. His favorite sectors: life sciences, travel and leisure, luxury goods, Scandanavian 5G cellular technology companies, defense firms, and for those willing to shoulder more risk, the big European banks.
Quinlan can’t recommend specific companies due to bank policy, but he says pharmaceutical or life science corporations dominant in Europe are likely to do well as the world’s population ages.
Because Europe remains a key tourist destination for the globe’s travelers—particularly from emerging countries like India, China, and the Middle East, companies tied to the travel and leisure industry should also do well, Quinlan says. Similarly, luxury goods makers, also reliant on these emerging market consumers, should continue to be good performers.
Quinlan also favors some of the leaders behind 5G cellular network technology. “The 5G global revolution is in the first inning, so I think there’s some upside for that sector,” he says.
Defense, Banks, and Bonds
Europe is seeking to build out its military capabilities in the next decade, as the region is “no longer confident the U.S. will be there,” Quinlan says. “The defense sector could come up with opportunities.”
Those willing to shoulder risk should consider European banks, which are “under-owned and unloved, and for good reasons,” he says. That’s because they haven’t strengthened their capital structures like banks in the U.S., and their balance sheets have room for improvement.
But these banks hold promise given the strength of the EU’s economic output, and the fact it is home to 500 million people who need banking, Quinlan says. Also, the EU is slowly moving to integrate capital markets activities across the Eurozone, “which is bullish for the banking sector,” he says.
As for European bonds, Quinlan advises investors to “stay clear, as rates on government bonds continue to sink. For those looking for income, he notes that many of the stocks the firm is recommending pay dividends.
Europe is in “unchartered territory when it comes to where they are with the ECB, the new cycle of easing and negative debt,” he says.