Forstrong CEO says Europe has made a giant step in the direction of a common fiscal union – and investors should take note
WP has teamed up with Forstrong Global CEO and CIO Tyler Mordy for a weekly series highlighting and analysing seven macro super trends for 2021. In part one, he explained why a fiscal revolution is here, while, for Super Trend 2, he analysed the inflation landscape and its investment implications. In part three, Mordy delved into the low bond yields and the subsequent 'income famine' and, in explaining Super Trend 4, he examined the state of Big Tech. Here, in Super Trend 5, he turns his lens on Europe.
The Eurovision Song Contest is a classic case of a whole being greater than the sum of its parts. Take each song in isolation and you’re exposed to, at best, substandard, cringeworthy pop the Spice Girls would laugh out of the room. At worst, the Maltese entry might combine folk, opera and techno in a way that’s surely a parody until you realize it’s not.
The songs are bad, the performance often laughable and yet, as an event, it’s a glorious tongue-in-cheek celebration of all the colour, charisma and oddities the various nations bring to the table. People host Eurovision parties at home, fill the fridge with beer and laugh along when the U.K. gets “nul point” or Cyprus and Greece vote for each other again.
The countries are disparate but share a common goal and spirit. Could it be that the economic forces within the EU are finally establishing a collective “eurovision” of their own? Tyler Mordy, CEO and CIO of Forstrong Global believes that is certainly the case, with COVID-19 propelling the region’s move away from fiscal austerity towards fiscal integration.
The EU’s jointly funded Recovery and Resilience Facility (RFF) is worth $672 billion and is set up to run for six years between 2021 and 2026. Notably, it’s the product of an unprecedented agreement among EU leaders to collectively borrow money and fuel the spending required to overcome the impact of the pandemic.
Mordy said: “The pandemic has allowed the EU to smash two major taboos: explicit fiscal transfers across countries, and the large-scale issuance of common EU bonds which required a larger EU budget for the first time since 1988. All of this is a giant step in the direction of a common fiscal union.
“Looking ahead, the policy signal is unambiguous. The market used to worry about the Eurozone breaking up but the sight line for the next three to five years is a steady path to integration, a more growth-oriented fiscal policy, and bye bye to fiscal austerity. Jean Monnet, a founding father of the EU, said: 'Europe will be forged in crises'. He was right.”
Forstrong’s macro analysis views the geopolitical world as a tripolar one, with the U.S., emerging Asia and Europe the main totems. Mordy told WP the most interesting question right now is whether the COVID crisis produces meaningful reform from this slow growth, secular stagnated, new normal type world? What will the lasting legacy of the virus be?
In many ways, he added, Europe is the poster child for the policy breakthroughs explained in Super Trend 1's fiscal revolution because it has been stagnant for so long. Forstrong believes all three regions are poised for sustained growth but Europe is a particularly interesting case.
For years, investors have been skeptical of its obvious architectural flaw: a monetary union that lacks a shared fiscal capacity.
But Mordy explained that the crisis has revealed a fiscal union is necessary to offset any shock in one individual nation and prevent it spreading to the broader region. The message appears to be that the EU now understands that policy cohesion can work better to generate more balanced growth for each member country.
With concerns around inflation and increasing national debt not a concern for now, the recovery fund represents a “massive turn in EU policy”.
Mordy said: “The investment implications are that it should now compete better with the U.S. as a destination for capital and lead to a structural re-rating of the eurozone stocks, which have chronically traded in a steep discount to America for a long time.
“Looking at the difference between bond yields and stock market dividend yields around the world, the gap is most conspicuous in Europe. European stocks are far cheaper than their bonds. In Germany, you have negative nominal bond yields on the 10-year Bund and you have reasonable valuations in the stock market, and very solid, good dividend yields. Which asset class do you think the marginal dollar will be attracted to?”
Old stories are in the process of being changed to new narratives, he added, although investors shouldn’t get carried away. Europe will never compete with Asia in terms of growth profile because of its underlying macro factors but change is afoot.
Mordy said: “It's always what's in the price and the European stocks trade at big discounts, especially to their American counterparts. We're not expecting a massive growth revival but even if Europe can shift the gears somewhat, have a higher growth cycle that feeds down into corporate profits, we’re looking at a change in perception, for sure.”
Investors will always look for pockets of value around the world and Mordy said there are huge areas of value in the Eurozone’s stock markets, especially with the region poised to begin a new cycle as a more cohesive union. The pandemic crisis has forced a collective strategy upon them. Just like Eurovision, it seems everyone has realised they are better off together.
