What's up across the pond? What's up across the pond? http://www.federatedinvestors.com/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedinvestors.com/daf\images\insights\article\bridge-oberbaum-berlin-small.jpg March 29 2021 January 21 2021

What's up across the pond?

German elections, recovery and, finally, an end to Brexit saga.

Published January 21 2021
My Content

Now that Joe Biden has become the nation’s 46th president and Congress has fallen into the Democrats’ hands, U.S political uncertainty for the most part has been extinguished, the typical congressional maneuverings aside. Not so in the European Union (EU). Its largest member, Germany, will hit the polls in late September to elect members of Parliament, who will then determine the next chancellor. Since 2005, the office has been in the steady hands of Angela Merkel, who is stepping down. The key question is whether her current grand coalition government led by the moderate Christian Democratic Union will hold or if the more populist Greens party continues to gain momentum. The outcome could potentially change the German political landscape, giving new life to a global populist wave that arguably waned with the exodus of Donald Trump from the White House.

How German voters respond could well be determined by how well the recovery from the Covid-19 recession has taken hold by the time the Sept. 26 elections roll around. While most sectors and countries already have started to rebound from the steepest and shortest recession in economic history, a sharp acceleration in growth isn’t likely until the second half of the year, when vaccinations will have been underway for six months. Just as in the U.S., we expect European consumers, bolstered by support from massive fiscal and monetary stimulus, to emerge from their Covid caves ready to splurge on everything they were forced to forego during the pandemic—travel, dining, shows, concerts, sporting events, etc. Even though the EU has approved $2.1 trillion on Covid relief, we think another round of aid will come in the year’s first half to offset the pandemic’s still devasting impact from a second, more contagious strain that has sent cases and hospitalizations soaring to new highs across the continent. 

Even though the new strain has hit Britain particularly hard, we believe U.K.’s equity market could be a surprisingly strong relative performer this year as the virus fades and life begins to return to normal. As of year-end 2020, the FTSE 100 had trailed the S&P 500 and the Nikkei 225 by more than 70% and MSCI Europe by 20% since Brexit was approved more than four years ago. But with the U.K. and the European Union finally striking a separation agreement on Christmas Eve, the uncertainty over the timing and terms of the divorce, which weighed heavily on the U.K., have mostly been removed. Given its low valuation (about 15 times 2021 projected earnings-per-share) and value/cyclical bias (over half the index is represented by Financials, Materials, Industrials and Energy sectors), the FTSE 100 represents a potentially unique investment opportunity that falls in line with Federated Hermes’ “value” and “international” preferences this year in its stock-bond models.

Tags 2021 Outlook . International/Global . Equity .

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Past performance is no guarantee of future results.

Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices.

Diversification and asset allocation do not assure a profit nor protect against loss.

FTSE 100: The Financial Times Stock Exchange 100 Index, aka the FTSE 100 or FTSE, is a capitalization-weighted index consisting of the 100 largest companies, ranked by market cap, listed on the London Stock Exchange. Indexes are unmanaged and investments cannot be made in an index.

International investing involves special risks including currency risk, increased volatility, political risks, and differences in auditing and other financial standards.

Japan's Nikkei 225 Stock Average is a price-weighted index comprised of Japan's top 225 blue-chip companies on the Tokyo Stock Exchange.

MSCI (Europe): An unmanaged, market value-weighted average of the performance of over 500 securities listed on the stock exchanges of 15 countries in the European region. Indexes are unmanaged and investments cannot be made in an index.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

Stocks are subject to risks and fluctuate in value.

Value stocks may lag growth stocks in performance, particularly in late stages of a market advance.

Federated Global Investment Management Corp.