The European Credit Strategist: Europe 2.0: Stronger, leaner, meaner?

Redacción - Viernes, 22 de Septiembre

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The European Credit Strategist: Europe 2.0: Stronger, leaner, meaner? •  As elections and referendums return, political uncertainty in Europe is now lower than in the US. •  Progress on US tax reform will not be lost on European leaders, we think. •  We continue to believe that some European companies will be under pressure to releverage.

Populism's antidote

2017 started off with much consternation about the rise of populism. In the end it was the proverbial dog that didn't bite. Yet, elections and referendums are returning. Political uncertainty in Europe, though, is now lower than that in the US for the first time since August '12. What's driven the sentiment change in Europe given that wealth inequality - an important driver of populism - is still being exacerbated by low rates? We think Europe's growth story means voters now have more to lose by embracing the unknown.

Europe's mini tax moment?

Angela Merkel is widely expected by the media and opinion polls to be German Chancellor again after this weekend's elections. Focus could move to building a stronger Europe, especially in light of the ECB's withdrawal of QE. Merkel and President Macron have talked previously about harmonizing corporate tax rates in Europe. But we believe this initiative could take on greater importance if President Trump delivers a sizeable corporate tax rate cut: the US will effectively "piggy back" much of Europe in lowering its tax rate. In fact, Germany's corporate tax rate will begin to look relatively high. Over time, if Europe sees a drift down in some corporate tax rates, then we believe it will be a helpful tailwind for credit spreads.

But a more "protectionist" Europe as well?

The irony, we think, of a stronger, less fragmented Europe, is the pressure on it to become more "protectionist". A revival in corporate earnings is, unavoidably, making European companies tempting takeover prey for foreign bidders. China's dominance on the world growth scene is translating into a rapid increase in outbound M&A by Chinese firms into Europe. While the European Commission is helping governments vet foreign takeovers, stopping the trend will prove more difficult. Thus, we see growing pressure on some European companies to get bigger and lever up, just to fight off the risk of being bought themselves. We update our corporate releveraging screen on page 7.

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