Both the French and German exchanges easily outperformed the FTSE 100 in 2021, but what will the new year bring? Our overseas investing expert sets the scene for an interesting 2022.
Europe will enter the new year with three worries hanging over the continent. In rising order of concern, they are political uncertainty in its two leading nations, the arrival of yet another wave of Covid-19, and spoken and unspoken threats from Russian leader Vladimir Putin.
Germany, so long the powerhouse of the European Union, has a new Chancellor after Angela Merkel, a rock at the heart of Europe, finally stepped down following 16 generally stable and prosperous years. The outcome of the ensuing general election has created additional uncertainty, with Merkel’s conservative CDU party losing power to major rival SDP. The SDP has formed a new centre-left government through an uneasy alliance with the Greens, whose priorities are at variance with the other coalition party, the business-friendly FDP, which has previously been the junior partner in several governments.
New Chancellor Olaf Scholz has been vice-chancellor to Merkel under a grand coalition of Germany’s two main parties and is trying to present himself as a Merkel mark 2, broadly continuing her policies. However, he also talks about a fresh start for Germany, which sounds contradictory.
To hold the coalition together, his ability to instigate serious change will be limited, and fiscal discipline, the hallmark of the country since the Second World War, will be maintained. Scholz favours encouraging greater private investment, which should be good for the general economy and, by extension, investors. The aim is for more public investment, too, but the scope will be limited as the pandemic has affected government finances as hard as in other countries.
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There are ambitious plans to help the environment by phasing out coal quickly and speeding up the switch to renewable energy.
The greatest fear for investors is that the new government will be short-lived, creating new uncertainty. Such a broad coalition has not been seen before in Germany. Two key ministries on which economic growth depends are in the hands of the two smaller coalition partners, parties with widely different priorities. Scholz will have his hands full holding the line.
France does not face its own presidential election until April, but it is already casting a shadow over the performance of Emmanuel Macron, who will be grandstanding in the meantime to bolster his image of putting France first. This could prove disruptive to the French economy, not just because he has fallen out big time with the UK government, but he also risks the much more serious outcome of creating a breach with the new German Chancellor.
Under the French system, the top two candidates in the first round will run off against each other two weeks later. While Marine Le Pen, leader of the former National Front, was the likely contender, she was seen as too far right for most voters. But Valerie Pecresse, a protégé of former President Jacques Chirac, has emerged as the Republican Party candidate and recent opinion polls show her edging out Macron.
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The second imponderable, the spread of the Omicron variety of Covid-19, threatens all parts of the world, but Germany has been hit by a fourth wave of the virus, and nearby countries, particularly Austria, are also struggling to control the outbreak. France has felt it necessary to impose travel bans on UK citizens to stop Omicron from crossing the Channel but can do little to prevent the variation crossing its land borders.
Cases and deaths in Germany have reached the kind of levels last seen in January and hospitals in several parts of the country are reported to be pushed to the limit.
The outlook for the German economy is mixed. Economic growth this year will come out above 2%, but momentum has slowed in the second half thanks to supply chain restrictions and pandemic shutdowns, putting in doubt previous expectations of a 2022 figure above 4%. Even if that is achieved, growth will subsequently moderate to nearer 1% on current trends, although it must be said that forecasting economic growth is notoriously difficult.
The greatest uncertainty, though, is outside the EU’s borders in the shape of Putin. He has already flexed his muscles by reducing then restoring the gas supplies on which Europe, and Germany in particular, are so dependent. The threat of a Russian invasion of Ukraine hangs in the air.
Merkel was accused of putting trade interests before political considerations. Scholz is expected to take a tougher line with Moscow and could refuse to put Russia’s already completed Nord Stream 2 gas pipeline to Germany into operation, but the outcome would probably hurt Germany more than Russia.
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On a completely different note, the gig economy could come under threat in the new year as a EU directive provides greater workplace rights for more than four million workers currently classed as self-employed. It offers them the right to earn the minimum wage and be entitled to sick pay and paid holidays, rather than be paid on a job-by-job basis. It is estimated that the move would cost companies such as Uber (NYSE:UBER) and Deliveroo (LSE:ROO) a combined €500 million a year.
Companies affected are caught between a rock and a hard place. Some have threatened to reduce working hours, but that would hit the companies as well as the workers. They could try allowing workers to choose their own working hours, which would protect their self-employed status, but that would destroy the whole ethos of the gig economy. Right now, gig economy companies with a heavy European presence look a doubtful investment unless the directive can be overturned.
Despite the persistent effects of the pandemic, Europe was on the whole a happy place to be for investors in 2021, with the two main indices mainly on an upward trend.
The CAC 40, the benchmark index for the Paris Bourse, started around 5,500 points and, despite easing a little during January, it has finally edged past the previous peak of 6,700 set as long ago as August 2000 to hit a new record of 7,150 in mid-November. In the intervening two decades the index has twice baulked at 6,000 points. It now seems to be settling around 7,000.
In Germany, the DAX Index has followed a similar course after starting the year at 13,900 points, though the gains have been more moderate. It took a little longer to break upwards but a new peak of 16,251 was set on the same day that Paris hit the top.
Both indices have come off the boil with the emergence of the latest Covid-19 wave. If the Omicron mutation proves to be milder than the Delta variation it is replacing, there is no reason why the upward trend should not be renewed.
Although EU inflation is, at 4.9%, the highest it has been since the single currency was formed, it is expected to fall back in the new year, making action from the European Central Bank (ECB) less likely. The ECB has promised to remain flexible. Investors should do likewise.
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