Eq: Dev ex-US
We thought it would be good to add a little European flavor to today’s coverage. The Financial Times has written a very insightful piece about the EU and the effect Brexit has had on it. In particular, it cites Donald Tusk, one of the EU’s top policymakers, who says that Brexit has been a “vaccine” against anti-EU parties across the continent. “As Europeans see what Brexit means in practice they also draw conclusions … vaccine against anti-EU propaganda and fake news”.
FINSUM: The EU has seen what Brexit has done to quell any anti-EU sentiment within the Union, which means it will never let off the gas pedal in making Britain’s departure a hellish ordeal.
One the tail risks for markets right now is the sharp downturn that is supposed to happen to the stock buyback market. Huge levels of corporate buybacks have been supporting US equities for years, but that is forecast to drop dramatically. While that may wound US stocks, it poses a major opportunity for another area: Europe. European stocks don’t see much in the way of buybacks, which has left them much less loved than the US recently. However, the declines in US buybacks are likely to make Europe look much more attractive.
FINSUM: European valuations are significantly more attractive than in the US, which means that if the playing field gets levelled by decreased buybacks, there is probably a good opportunity here. That said, Europe has a lot of economic issues right now.
The move towards passive management has been worthy of the term “flood”, with investors pouring funds into ETFs and out of mutual funds. Fees have been a major part of that shift, but performance has been too, as active management performance has been broadly weak over the last decade. However, there are some areas where mutual funds have significantly outperformed passives—international funds. Especially in emerging markets (e.g. India and Mexico), but also in developed ones like the UK and Italy, 10-year track records show significant outperformance for active managers. The opposite is true in US funds.
FINSUM: Sifting through market opportunities gets harder and harder (and finding alpha alongside it) as you move into less liquid markets. Accordingly, we think there is a lot of benefit to using actively managed funds for international stocks.
The journey of Brexit has been long, winding, and utterly confusing at times. However, it is all headed for a dramatic conclusion. PM May has called for a Parliamentary vote on her plan on March 12, just a couple of weeks before the UK is supposed to formally depart the EU. However, the pushback on the left has been so strong that opposition leader Jeremy Corbyn now looks poised to call for a second referendum on EU membership. He announced the position yesterday, marking a major change in position.
FINSUM: We absolutely dismiss the view that holding a second referendum is “undemocratic”. The vote was almost three years ago now and no one could have foreseen the deal Britain might get, so it only makes sense to have another vote.
If you look at it from the outside, a second Brexit referendum has had the feeling of inevitably for at least a year now. The chaos and unexpected fallout from the fraught negotiations between the EU and UK have made it seem likely that the British people would need to settle the matter with another vote. That expectation is now looking likely to turn into a reality as Britain’s opposition party, Labour is backing a plan to bring forward a second vote.
FINSUM: In our mind, the claims that holding a second vote is undemocratic are ridiculous. On the one hand, no voter back in 2016 could have known how this Brexit mess would actually progress, which means the people should get a second chance to decide on the deal at hand. On the other, how can a whole nation voting on an issue ever be considered undemocratic?
So far Brexit has been the complete mess everyone expected. The whole deal looks like it is hurdling towards a chaotic no-deal departure. Parliament looks very likely to reject PM May’s deal, a vote on which she has delayed in order to save face. However, the EU has just extended a major olive branch by virtue of its judiciary. The top EU court just ruled that the UK can unilaterally back out of Brexit at any time despite the fact that they have formally enacted Article 50, or the official leaving process from the EU.
FINSUM: All they have to do is hold a Parliamentary vote or second referendum and this whole mess would be over. IT is a long way from something that simple happening.