Stimulus package puts Europe on road to recovery

We’ve been keeping a careful eye on European equity since the earliest days of the pandemic. At the beginning of the year, economic momentum seemed to be on Europe’s side. As infection levels spread, however, growing concern about the impact on European companies – and Europe’s record of being slow at taking decisive action – led us to reduce our exposure.

Now, though, we’re adding to European companies once more. As well as having demonstrated a firm hand in dealing with infections, the recovery package announced by the European Commission last week could help the region’s markets bounce back.

The package has been a positive surprise for investors, not just due to its scale but also its implications for the future of the European Union (EU).

Coutts Head of Asset Allocation Lilian Chovin says, “The huge stimulus package and renewed political unity are a big motivation for investors to go back to Europe. While we do expect continued volatility – especially over the summer – Europe could have more upside surprises in the coming months.”

As always, nothing is guaranteed when investing and you run the risk of getting back less than you put in.

What’s in the package?

The €750 billion stimulus package is split between €390 billion of grants to support the areas that have been worst affected, and €360 billion in low-cost loans available for businesses to help them through the recovery period.
 

As important as the scale of the package, however, is how it’s being funded, and what that says about the future of the EU. Member nations will collectively borrow funds from the capital markets to fund the package, making them all collectively responsible for the debt.

While this sounds like a bit of a boring footnote, it’s actually a major step forward for EU unity. Sharing debt responsibility in this way is a big development that the EU has avoided thus far, and has previously been seen by many as a step towards a ‘United States of Europe’.

While it’s not likely to lead to a European super-state in the near future – or at all, in fact – it demonstrates that there’s political will to get the member states of the EU to work more closely on economic development.

Lilian says, “That’s important to investors because it creates a potentially more favourable environment for European companies. With close co-operation across European national borders and less chance of a break-up down the line, companies could find it easier to grow and develop and – ultimately – increase earnings for shareholders.”
 

The green agenda

A key part of the agreement is that almost a third of the funding has been set aside for projects that tackle climate change. Combined with the EU’s commitment to focus its €1 trillion long-term budget – also announced last week – on sustainable projects over the next seven years, this means the EU is engaging on the biggest green stimulus in history.

We’re likely to see many European companies take on projects to improve the environment and change how they operate to reduce their carbon footprint. This will help us fulfil our own target to reduce the carbon emissions in our portfolios by 50% by 2030.
 

Not all plain sailing yet

Europe nonetheless has some way to go before it’s business as usual. As we’ve seen with the UK’s announcement of quarantine for travellers arriving from Spain, the pattern of infections can still disrupt the European economy. The hospitality sector in Spain relies heavily on UK tourist trade so this will be a blow for the Spanish economy.

“We could see these spikes in infection and international reaction have an impact on individual countries. In addition, we’ve yet to see what the autumn and winter could bring in terms of a second wave and further lockdown measures,” says Lilian.

Despite this, the recovery package could be enormously positive for the longer-term prospects of European equity, supporting our moves to increase our allocation.
 

When investing, past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.