Economic impact of Paris attack is minor; political questions linger


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Kevin Lilley, manager of the Old Mutual European Equity Fund, comments following the terror attacks in Paris on Friday 13 November 2015

With the terrible news of this weekend’s terrorist attacks in Paris fresh in our minds, thoughts extend beyond the condolences to those impacted, to the consequences for European equities.

Whilst there is likely to be a temporary impact on French tourism and retail sales, the economic impact is likely to be minor as this may well be offset by increased spending on security and defence.

What is difficult to evaluate at this stage is whether the event will boost far right politicians in both France and other European nations. It is also unclear to what degree this puts further pressure on securing the borders of Europe and the freedom of movement of people within the Schengen zone, already a hot topic of discussion with the ongoing flow of migrants from a war-torn Middle East.

We must hope that this event leads to greater co-operation between the West and Russia – following the recent terrorist attack on its citizens – to try and solve the prolonged Syrian crisis and calm international tensions.

 

Meanwhile, European equities remain an interesting asset class as we are about to enter the third year of a slow but improving recovery.

GDP growth of around 1.5% is being supported by a weakened euro, as a direct result of policy actions and communication by Mario Draghi’s European Central Bank, which makes Europe more competitive in the international arena. Valuations remain attractive in terms of dividend yield and earnings multiples – which are based on still-depressed levels of profitability that are still below pre financial crisis levels.

The consequences of the eurozone crisis are still evident as reforms continue in a number of countries, where rigid anti-competitive labour regimes are being broken down and replaced by more flexible, business-friendly ones. In Europe it often takes a crisis to engineer progress.

Don’t expect totally smooth sailing, though. European news will always be noisy, when you have a collection of 28 members of the European Union with different languages and cultures. The collective may often be frustrating, but the combined power base makes this a formidable region in terms of military and negotiating might, with generally strong corporate and ethical governance.