We’ve previously mentioned the challenges facing Europe, but despite this, the bloc is currently registering positive economic results. Surely things aren’t all that bad?
The stock market’s impressive run this year suggests so.
There are several reasons for this, including the mild winter and China’s reopening, which means many investors eager to tap into the country’s big market.
With tensions between the US and China escalating, investors are looking for more indirect ways of doing so and European luxury brands, because of their appeal across Asia, present a perfect opportunity.
Another factor is the low price of European equities which are being gobbled up by US investors who have done very well in the stock market recently.
Furthermore, it looks like Europe will have another good summer for tourism, especially from the US. The continent, particularly the south, remains a desirable destination for travellers who are eager to explore and, most importantly, spend their money.
Europe is a dominant player in the luxury brand market but is it big enough to be a driver of European economies?
Luxury brands – the Hermes and Louis Vuittons of this world – are known for iconic products that are synonymous with a certain lifestyle and above all, status.
Unlike tech, most European countries have their own champions in the luxury market, like Hugo Boss in Germany or Moncler in Italy. Because of their legacies, demand for these products can be considered a structural trend, especially in highly hierarchical societies like China. Fashion is also a part of human nature and something we are always likely to want in some form or another.
Major luxury brand stock prices have been on a strong run since October and have performed pretty much every other European stock, including after the collapse of Silicon Valley Bank (SVB).
So, I would say that the momentum from China, combined with US citizens’ splashing out on European trips, make the luxury brand market an essential sector for Europe in the long-term.
To what extent did the conservative nature of Europe’s banks spare Europe from contagion from the SVB collapse?
The European banking sector is much more fragmented and considerably less diverse than that of the US. European banks also have a higher aversion to risk, focusing mainly on loans rather than the issuing of bonds and other financial instruments.
In reality, it all boils down to funding. In the 1990s, we saw US bank shift towards capital markets, but this didn’t really happen in Europe, with the exception of a few ambitious players like Credit Suisse and Deutsche Bank.
This lack of access to capital markets means that European banks won’t fund certain tech start-ups or high-risk industries, while also making them less susceptible to contagion from crises like the SVB collapse.
Like luxury brands, European banks have also been on quite an impressive run since October. This was only interrupted by the SVB collapse which is clearly visible in the charts, but not of much concern. In fact, there was no need for any intervention by the European Central Bank. It is true that Europe’s business cycle probably lags the US one by about six to 12 months but, at least for the time being, it seems as though contagion isn’t a concern.
Luxury brand market an essential sector for Europe in the long term
What needs to change for innovation to play a bigger role in European economic development?
Europe lacks a banking champion, a super bank, that can service multiple countries simultaneously. For example, BNP is the biggest bank in Europe, but it isn’t present in many European countries, and while some Nordic banks have more of a focus on capital markets, they are the exception and not the rule.
Another factor is the fact that the ECB is quite tough on European banks, allowing them very little room for manoeuvre.
Unfortunately, these factors, along with the lack of effective disintermediation across much of Europe, are standing in the way of Europe really becoming a leader in innovation.
Emmanuel Macron was in China recently together with the EU commission president. How important to Europe is China?
Very important, and that’s the core of Macron’s message – showing China, and the Chinese consumer, that they are important to Europe. This isn’t an easy position to take given Europe’s alignment with the US on many issues; but there is also no denying the importance of the Chinese market for Europe.
Macron believes that Europe maintains close economic ties with China and was accompanied by a delegation of business leaders who signed a number of deals while there.
It seems like the other half of the trip’s contingent represented the other side of argument.
Ursula Von der Leyen didn’t look too happy to be there and in some senses represents the other European perspective on China, namely that Europe should not compromise on its values in exchange for stronger economic ties.
Which brings us back, as always, to Europe’s central problem – multiple spheres of influence and the lack of a unified strategy. France wants closer ties while Germany appears reluctant, even though both their economies rely heavily on the Chinese market.
What about the importance of Europe to China?
It’s easier to replace American brands than European ones due to their association with the European lifestyle and the continent’s heritage. European luxury brands hold status and appeal to Chinese consumers that most American brands don’t.
European tradition and history also resonate with Chinese society’s respect for hierarchy and tradition.
At the end of the day, the first port of call for a coherent China strategy is effective communication between France and Germany.
This needs to happen sooner rather than later, before the situation between China and the US escalates further.
This interview does not intend to give investment advice and the contents therein should not be construed as such. The Jesmond Mizzi Financial Advisors Ltd (JMFA) is licensed to conduct investment services by the MFSA, under the Investment Services Act. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For more information, contact Jesmond Mizzi Financial Advisors Ltd of 67, Level 3, South Street, Valletta, on tel: 2122 4410, or e-mail info@jesmondmizzi.com.