This is an excerpt from an interview with Michal Stupavsky, investment strategist at Conseq Investment for a podcast published on ThePrime’s YouTube channel.
What is the potential for Europe right now if it’s going to invest in itself in reaction to the new trade environment? Does it have to undergo further integration on a financial or legislative basis?
Definitely several things could help European long-term structural supply side growth. First of all, at least a unification of capital markets, financial markets firstly. Second, the bureaucracy and administrative burden on European companies is really very, very significant and it’s growing almost every day. So some easing of regulatory legislative requirements driven by the European Commission would be helpful as well. And third, last but not least, more and more significant support also from the public funds to startups to young innovative companies. US has its Silicon Valley and unfortunately such a strong innovative setup for young companies in Europe is to some extent unfortunately missing at the moment in my opinion.
Ultimately, do you think it’s possible that there’s a scenario in which this whole episode of last month is going to end up being a net positive for Europe? Is there an opportunity in this Europe?
I think still Europe is in a relatively difficult position, especially the industrial sector, which has been in severe crisis for the last three years at least. Especially the German industrial sector. At Conseq, we are following the Purchasing Manager’s Index very closely. It’s been below the key 50 point threshold for three years now in Germany, the Czech Republic and Poland. So, the operating conditions of the European industrial sector have been worsening.
In our opinion, this has been driven by very high energy prices for both electricity and natural gas, which are multiples of the prices in the United States or in Asia. Unfortunately, there has already some deindustrialization of the German economy because currently the gross value added or total value of industrial production in Germany is between 15 and 20%. That’s one-fifth lower than the all time high from 2017. I would personally say the last three years have been a disaster for the German industrial sector.
Does that mean Europe should have raised tariffs sooner?
We think that without more competitive energy prices it will be rather difficult to bring meaningful revitalization of German industrial sector. At the moment there is not so much light at the end of the tunnel. That being said, other companies, other sectors in Europe as regards stock markets look pretty attractively valued such as the luxury sector or certain even industrial names.
How dependent on trade with the US and on the American economy in general is Europe at this point? What will the impact be for CEE?
As regards Central Eastern Europe, direct exports to the United States are relatively low. Nevertheless, the indirect links via Western Europe in general and German economy in particular are quite extensive. Erste Group’s chief economist forecasts between 0.2 and 0.4% lower GDP growth than he expected pre-Liberation day.
So, it’s not too significant, but still business confidence has been dented. Not just in the US but also in the European economy. I personally think that corporate investments, capital expenditures will be on the soft side for the next two years in Europe. Given all the uncertainty, CFOs and their teams of advisors at don’t know what to put into their Excel spreadsheets in order to evaluate potential investments. Their job is now extremely complicated.
In the US economy where we have the best and most timely data, we see that corporations are cutting CAPEX plans quite significantly.
That means that even if all the tariffs were to be whisked away at the flash of a wand, it still leaves a huge shadow of uncertainty.
Unfortunately not. The new global macro regime is marked by extremely elevated global geopolitical and economic uncertainty. It’s much higher compared to previous years. That’s why maximum diversification of investment portfolios will be the key to wealth preservation and good for achieving decent investors performance.
Why should real estate play an important role in an investor’s portfolio?
It’s a real asset, we can touch it. Compared to government debt or money supply in the global economy, real estate assets can’t be built very quickly. The construction industry has a finite capacity. That’s why as a real tangible asset in the long-term perspective, real estate tends at least to keep it real purchasing power. So it’s a wealth preservation instrument and we recommend to our clients, to our investors to hold at least 5%, maybe even 10% over their savings in real estate assets.
