The ECB interest rate cut sent a strong message about their commitment to strengthening Europe’s economy. The question that faces us is whether the cut is good or bad news. On the one hand, lower interest rates will encourage people to invest into the equity market. On the other hand, it is slightly worrying that with inflation falling to 0.7% in October the ECB were concerned enough about the possibility of deflation to take action.
France’s downgrade was largely anticipated and is a bit of a moot point. While Gallic pride might be affected, we are more concerned about the political backdrop in France. Directionally, President Hollande’s tax increases have added to uncertainty, making some people reluctant to invest. After all, if you do not have to be in France, why be in France when faced with such headwinds? Sentiment can be a tough thing to change and it is important that we see decisive and supportive political rhetoric from Hollande towards businesses operating in France before it develops into a problem for the long term.
Nonetheless, France remains home to some well-managed globally structured businesses, such as aerospace equipment manufacturer Zodiac, industrial gases producer Air Liquide, diversified healthcare company Sanofi and electrical equipment-maker Schneider Electric. These are international firms that happen to be based in France, but which generate a significant part of their revenues from beyond Europe’s borders.
More broadly, investors continue to embrace risk. Over the past six months we have seen a significant re-rating of telecommunications firms, utilities and banks in Southern Europe in general, as well as more ‘rough-end’ cyclical stocks. I would be concerned about joining that party. Markets are pricing in a lot of assumptions about future profit margins which do not seem that sensible. We prefer to stick to our consistent investment process, focusing on companies with pricing power and global presence, which tend to dominate, or be a major player, in their niches.
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