26 May - update from our investment partner

  • 26th May 2020

What has happened

Yesterday was a quiet day for markets with the US and UK on holiday however with a void of bad news around the US/China relationship, indices rose. In many ways this is typical of the last month, when there is a lack of negative news flow the abundant liquidity provided by central banks and governments cause equities to rally.

The EC’s recovery fund unveiled

The focus this week is likely to be on the EU Recovery Fund and we hear from EC President von der Leyen tomorrow where she will unveil the recovery plan proposals. Given the so-called Frugal Four’s plan involved no grants and an element of conditionality we do not hold high hopes of a compromise this week. There was some hope that the Macron Merkel plan unveiled last week would encourage a compromise from the more fiscally conservative Northern bloc. The Frugal Four proposal spearheaded by Austria doesn’t appear to have any common ground with the Franco-German plan however. The contentious area is the philosophical debate about whether assistance across the EU should take the form of a handout or a repayable loan. The markets would have hoped that the debate would have moved to the ratio of grants vs loans by now, but the initial philosophical hurdle remains. This is not a simple obstacle to jump as there is sizeable domestic political resistance in Northern Europe to the EU becoming more akin to a fiscal union, something outside the scope of the current Treaties.

What does Brooks Macdonald think

Our base case remains that we will get an eventual recovery fund but that it will take longer than the markets would like. As economies restart and the peak of the coronavirus crisis passes, the political pressure to form a fund will fade. It is highly likely that countries such as Italy and Spain will underperform the wider European bloc as they reopen their economies, and this will only exacerbate the economic divide between the North and South. For a major breakthrough in the recovery fund things will likely need to get worse either economically or through a second wave of viral infections. European equities would therefore likely need to continue their underperformance in order to release the fiscal burden sharing the Southern economies badly need.

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