The Badger of Broad Street Returns from his European Sojourn!

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Apologies for this late missive from the badger’s sett but I’m just back from the continent where I spent a large part of last week trying to figure out how things are really developing across Europe. Three very different Cities were visited, each with three very different outlooks on life… 

Back in London, our beloved and dear leader, Mr Cameron, seems to have become rather distracted by his determination to make sure that a perfectly faceless Luxembourg Politician will not be made grand Poo-bah of Europe, or some such position… Unfortunately, it’s a vote he’s going to lose; mainly because no one else in Europe particularly cares about the European Parliament or who its President might be. I’m worried by comments in the newspaper that Mr Stuka (as Junker is unaffectionally known) has developed a pathological hatred for the UK. That really won’t help. I’m going to listen to Mr Farage speak later this week, and will be most interested to hear his thoughts on the matter, and which will no doubt make “Dave” look weak. No change there then…  

The thing about Europe is that it actually does matter. A strong Europe benefits the UK in terms of access to trade. At a time of Euro weakness, the relevance of Europe to the UK becomes less clear – which is why hostility to the concept of Europe has reached an all-time-high on these Islands at the present time. Unfortunately, that economic weakness looks set to continue. 

In Paris I spoke to bankers and investors who see the French economy going through many deep and repeated adjustment problems over the coming years. While Dave here in the UK is like a much-loved but bumbling idiot brother, the business classes in France have absolutely no time for Mssr Hollande. He appears to be universally disliked in business circles. They believe he has absolutely no authority or motivation to free up French industry from the dead hand of state-intervention, and is losing the battle to give France any sort of business relevance within global markets. He will suffer as much as the bank BNP when it is fined $9bn later the week by the Americans. The French, despite world class industry and technology, feel they are increasingly marginalized globally and in Europe. We can see that in declining business and banking confidence. I came away from Paris quite depressed for them. 

In contrast, Frankfurt is starting to bustle. German businessmen are very positive on German industry and the prospects for growing market share. Across the Mittlestand I was hearing about just how their good banking relationships are. I would appear to be easier for German mid-caps to borrow money from local banks than elsewhere in Europe. Score one up for the much derided Landesbank and Co-Op banking model. The bottom line is German bank managers may be deliciously parochial but lend money to local businesses they actually know and are involved in (experience shows that works in growth times, and comes back like a vengeful scorned wife in the bad times!) Compare this to both France and the UK where SME lending is centralized and done by unfeeling computers. The downside is I didn’t get the sense that bankers really had much idea of what’s actually going on… In Frankfurt, the rest of Germany feels a long way away, and Europe is dimly perceived; somewhere else where they really don’t want to be lending to. No wonder Angela Merkel has such as difficult role to play… 

It’s a very different story in Milan howevever You can’t disguise the thin veneer of respectability that looks increasingly faded over the crumbling economy. Speaking to bankers, they bluster about recovery but have many capitalization concerns as bad lending mounts. They are very fearful that Italian politics are not being reformed. There is the threat that at any time soon the Italian economy may suffer a new debt shock as it becomes clear nothing is being done to correct chronic state lending imbalances. As always, the Milanese blame the southerners. But, under the bluster I detect distinct signs of wider weakness and crashing confidence in the future – small Italian corporates slogging on and making on-going losses in difficult markets, or good family business struggling to find buyers for aging owners because Italy’s best and brightest sons and daughters have moved to better jobs in London. 

But let’s not worry – Mario Draghi has promised us rates remain low. And that wall of money he is throwing at banks will be invested – which means stocks are unlikely to weaken and peripheral bonds will continue to tighten. 

So my trades for this week? German stocks and Peripheral debt – keep buying them!

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