Viewpoints with Burkhard Varnholt - A global markets podcast (Ep. 75)

Burkhard Varnholt · UBS

Europe has a structural investment case, with growth and returns concentrated in its periphery.

Based on travel in Europe's periphery and on market data, he argues Europe's growth is coming from the periphery rather than the core. Peripheral stock markets have outperformed the broader US market over the four-year bull run, while Germany, the core, lagged. He sees a structural investment boom building around energy security and infrastructure build-out. That boom is largely politically driven, and he says the trains have left the station. He also sees a productivity increase in Europe, smaller than in the US, that partly leverages US high-tech without the massive capex, so it is less capital-intensive.

“I think there's a structural investment case for Europe, but not necessarily where most people are looking.”at 3:53

Burkhard Varnholt · UBS

France's recent spread widening is mostly global yields, not a eurozone crisis; markets are disciplining politics.

Street protests should not be confused with a risk of France triggering the next eurozone crisis. France has a large, diversified economy with globally competitive champions in luxury, tech, defence and energy. Its government debt has average maturities of about nine years or more, so there is no liquidity problem, only a growing debt burden. France also has Europe's highest savings rate, about 19%, which is a backstop that could be tapped by lowering the high taxes on bond holdings. He estimates about two-thirds of the recent credit spread widening came from the global rise in bond yields rather than from news on French debt service. Moody's and S&P confirmed France's rating, and the ECB has not stepped in because it would not help. He reads the spread move as a healthy signal from markets to parliament.

“most of the bond spread increases, the credit spread increases of the recent weeks, we believe even about two thirds of this, was probably driven more by the global increase of bond yields”at 8:28

Burkhard Varnholt · UBS

European stocks can keep their strong run, driven by earnings momentum, cheap valuations and possible reform.

Earnings momentum in Europe has been strong and he expects it to stay strong. European markets are about a third cheaper than the US even though European bond yields are significantly lower than US yields. Europe's savings rate is about 15% versus about 5% in the US, which he reads as pent-up demand for future consumption or investment. He also sees hope for political change on the capital markets union, banking union, cutting red tape and competitiveness, though he is unsure how much is talk versus action. Background: European periphery markets such as Hungary, Romania, Greece, Poland and Spain roughly tripled or rose 130-250% over the four-year bull market, and the top seven outperformed the S&P 500, which he takes as evidence of fundamental improvement in European business and economics.

“Number one, we think earnings momentum has been strong and will continue to be strong, and that's what I see sense here.”at 9:41