During the month I have been in the UK and Europe. The trip has increased my conviction in our investments and I feel we have the portfolio positioned well for the final quarter of 2017. We are particularly highly convinced of Europe as I wrote last week, with the EU economic recovery accelerating.
In the last week, Eurozone economic confidence hit a post 2007 high, and the German Ifo held near a record high. I believe that this data again confirms that the ECB’s policy stance is inconsistent with the economic reality.
European manufacturing and services PMI figures are both increasing, showing that the economic upturn is broad-based. Furthermore, the jobless rate is close to breaking below 9% (the peak unemployment was 12.1%). Draghi seems to be increasingly aware of this and again highlighted the accelerating recovery in his speech to the ECON committee last week.
All of this highlights to us that the European economy is now more vibrant than the US, which is further into its economic recovery. However, contrast the differences between monetary policy stances in Europe and the US. The Fed has already raised rates four times and recently started reducing its balance sheet, yet the policy there is still described as accommodative.
Meanwhile the EU maintains negative interest rates and is actively undertaking QE at a rate of €60 billion per month. We believe there is clear scope for the Eurozone to begin to follow the US to monetary normalization. This would obviously be bearish for EU bond holders and bullish for interest rate sensitive stocks, such as banks and insurers.
I think the ECB tapering decision is likely to be decided at the upcoming meeting (26 October) with QE tapering to start in January 2018. AIM will continue to have exposure to this theme and more widely the accelerating EU recovery.
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