Frankfurt or Paris? Dr. Holger Schmieding, Chief European Economist, Joh. Berenberg, Gossler & Co. Berenberg Bank, explains, which financial market will benefit more from Brexit. At the same time, Schmieding makes clear that London will remain the top center for tradable services in Europe even after Brexit.
Dr. Holger Schmieding will be speaker at Handelsblatt European Private Equity Summit in September 2017 in Frankfurt, Germany. Register now!
Dr. Schmieding, what do you think, are risks and opportunities for economic growth and capital markets under Brexit, Trump and Macron?
The global economy is enjoying a modest but mostly synchronized upswing. US president Trump has achieved very little so far. More importantly, he has not caused major damage so yet. While he wants to renegotiate NAFTA, the US have – so far – not embarked on disruptive protectionism. Brexit poses a major economic risk for the UK but not for the much larger EU27 for whom preferential access to the UK market matters only modestly. I expect president Macron to deliver some serious reforms in France. That, in turn, will make it easier to further strengthen the cohesion of the Eurozone as a whole. Overall, the economic outlook for much of the world is encouraging. While we don’t look for a genuine boom, the current upturn can continue with a chance that the pace of growth can quicken a little in many countries, including most members of the Eurozone.
Is the Brexit an obstacle or a chance for Private Equity and the financial market in Europe?
Brexit will force financial institutions to move some euro-related activities from the UK into the EU27. This will constrain the growth of the City of London and add jobs in Frankfurt, Paris, Amsterdam, Dublin and possibly a few other places. If France under Macron reforms its labour laws, Paris could be the main beneficiary. Otherwise, Frankfurt may attract more jobs. But because of its deep pool of talent, London will remain the top center for tradable services in European even after Brexit. London will just be less dominant than it would have been otherwise.
What is your outlook for capital markets?
Continuing growth at subdued inflation provides a positive backdrop for global equity markets. Although markets are no longer cheap, valuations do not look unreasonably stretched. The contrast between still elevated dividend yields and low bond yields suggests that there is room for bond yields as well as for equity indices to rise further. A major spike in inflationary pressure could end this positive scenario. While that may happen in coming years, it does not look imminent.