21 July 2019
US President Donald Trump and German Chancellor Angela Merkel meet at the G20 summit in Hamburg. Amid turmoil in the US, Merkel remains a stabilizing force in Europe. Photo: Reuters
US President Donald Trump and German Chancellor Angela Merkel meet at the G20 summit in Hamburg. Amid turmoil in the US, Merkel remains a stabilizing force in Europe. Photo: Reuters

Europe: New safe haven amid US turmoil

Another fatal attack happened in Europe as terrorists driving a van smashed into a crowd in Barcelona’s Las Ramblas boulevard, killing 13 people and injuring about 100.

The refugee and migration crisis among European countries appears to have reached a tipping point after years of mounting pressure on social services and the economy. As tensions rose, some refugees were recruited by extremists and participated in terror attacks in Europe. Then came the emergence of populism, fueled by anti-immigration sentiment.

The idea of the European Union is admirable but is extremely challenging to achieve. Last year’s Brexit vote provided a wake-up call to the EU, as the risk of EU disintegration surfaced from out of the blue. Worse, the surprise victory of Donald Trump in the US presidential election plunged Europe into a nightmare, indicating Europe can no longer count on Washington’s support against Russian aggression.

Owing to the sense of crisis, European countries are now feeling the need to act in unison once again, strengthened by the presidency of France’s Emmanuel Macron.

Germany, Europe’s biggest economy, will have a general election in late September. With a 15-point lead over her closest competitors in the polls, Angela Merkel is on track to enter her fourth term as German chancellor and reinforce stability in Europe. Alt-right parties on the continent are still far from coming to power.

On the other hand, the recent chaos in the white nationalist rally in Charlottesville, Virginia, really upset me. In particular, US President Donald Trump’s “blame both sides” stance on violence in Charlottesville is just terribly outrageous. It would be near impossible for any US chief executive to continue to serve on his business advisory councils, which Trump decided to abandon.

What really sparked market panic was Gary Cohn, director of the National Economic Council, who is rumored to be among those preparing to leave the White House.

The US stock market rally started with Trump’s election victory in early November on the president’s pro-business agenda. However, his response to Charlottesville, the possibility of Gary Cohn’s departure (denied by the White House), and just before that the widening rift between Trump and business leaders, seem to be enough for investors to redo the math.

If the Trump Bubble deflates, the S&P 500 is expected to drop by 7 percent, according to Bloomberg. But we should not neglect the fact that US corporate earnings actually improved, therefore I guess the pullback would be less, possibly about 5 percent, and it may last two to three months at least.

Amid the political turmoil in the US, investors are fleeing to Europe as a safe haven, raising the outlook for European stocks. The S&P 500 is trading at a price-to-earnings ratio of 21, which makes the valuation of European stocks look compelling with a PE ratio of 17.5.

The prospect of European stock valuation hinges on the banks. European banks are just catching their breath after the prolonged European debt crisis which began in 2009. With several eurozone member states drowning in debt, a few big-name banks in the region were on the brink of bankruptcy.

Last year, things seemed to have turned the corner. Europe’s economy expanded for a fifth year in a row, and banks reported better financial results, helping their stocks to recover.

European bank stocks are trading at a significant discount to their foreign counterparts. France’s BNP Paribas is trading at a price-to-book (PB) ratio of just 0.9, while that of Italian lender UniCredit SpA and Germany’s Deutsche Bank is merely 0.8 and 0.44, respectively, way cheaper than China’s major banks, namely, ICBC, China Construction Bank and China Merchants Bank, by market valuation.

Given their low PB ratio, European banks may need to launch a wave of capital raising, but it is well worth looking closely and grabbing a bargain.

This article appeared in the Hong Kong Economic Journal on Aug. 22

Translation by Ben Ng

[Chinese version 中文版]

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Eddie Tam is the founder and CEO of Central Asset Investments.

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