Outlook for Europe with Robert Peston | Masterclass

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  • 41 mins 04 secs

In this Masterclass Special, a panel of experts discusses the outlook for Europe and talks about what consequences there will be with the Trump election, political risks in Europe, Chinese markets and what effect a potential breakdown of the European Union would have on GDP.

On the panel are:

  • Hetal Mehta, Senior European Economist, Legal & General Investment Management
  • Cosimo Marasciulo, Head of European Government Bonds, Pioneer Investments
  • Léon Cornelissen, Chief Economist, Robeco
  • Ed Francis, Head of Investment, Willis Towers Watson

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ROBERT PESTON: Hello, and welcome to asset.tv’s Masterclass with me Robert Peston. Now obviously it’s been an unbelievably eventful time in the world of global politics and markets, but I thought we might have a chat about what the election of Donald Trump as US President means for all of us, and the ramifications are of course legion. He has promised a very expansionist fiscal policy: a lot more spending, lower taxes. Does that signal the end of the long bull market in global bonds? He has signalled rather less commitment to NATO than American presidents have typically shown. What does that mean for our security? But I think for me the big issue is we’ve now seen a whole range of votes in the Western World which have gone against the establishment. What does that mean for our ability to plan businesses, plan our economies?

Now I’m delighted to be joined by some brilliant investment and economic experts. On my right I’ve got Cosimo Marasciulo, the Head of European Government Bonds at Pioneer Investments; Hetal Mehta, the Senior European Economist at LGIM; Ed Francis, Head of Investment for the European and Middle Eastern Region at Willis Towers Watson; and Leon Cornelissen, the Chief Economist at Rebeco. And I think we’ll just start with a biggish question, which is what for you is the big consequence that you’re thinking about right now post the election of Trump, and if I could start with you Cosimo?

COSIMO MARASCIULO: I think it’s always difficult to call for a regime shift. A regime shift is by definition a low probability event. But it might be that 2016 will be remembered as the year when monetary policy supremacy ends, and when actually fiscal policy will play a much more significant role globally. And clearly this was a trend that started even before Trump election, but clearly after Trump election this will be a more sustained trend that we’ll see for the next few quarters. This means that the low for longer mantra paradigm that most central banks were talking about might not be there for the next few quarters or so. This makes the whole dots from the Fed, the previous dots completely obsolete, and we might need to see what the new reaction faction from the Fed will be. But more important Trump election is a positive overall for growth for the US economy.

We’re talking probably about 1% more for growth in 2017 and 2018 compared to where we were before. But a similar event in Europe, such as higher probability of Le Pen winning the French election might be in the opposite direction for markets. So we are in a period in which looking at 2017 there will be probably higher political risk but also higher risk premium in the asset classes because of this paradigm shift in monetary policy.

ROBERT PESTON: Well a huge amount to chew on there, and in particular whether this is as you say the end of us relying on central banks to bail us out. Hetal, how much of that do you agree with and what were your other thoughts?

HETAL MEHTA: I agree with most of what Cosimo said. For me this wave of populism that we’ve seen of which Trump being elected is only one part I think has been a key theme for this year, and will be as we go into a very heavy political calendar in Europe next year. It actually started way back. If you look at Greece and the elections there, we’ve had Brexit here, Trump, I mean these are just several layers, and there will be more I think that accumulate. So for me that’s really the big picture. With Trump coming in clearly the fiscal stimulus will be a net positive for the US, but globally as well.

Fiscal stimulus anywhere tends to be net positive. Monetary policy as a consequence of that we’ll have to see. I think there are some big spillovers that we could see in terms of the European policy space. If the Fed feels more confident in hiking, does that actually allow the ECB to turn more hawkish because currency depreciates etc. or do they actually feel monetary conditions are tightening and therefore they have to do even more to keep their economy stimulating. I think it’s an interesting trade-off. And that really ties in with the politics quite significantly as well.

ROBERT PESTON: It certainly does. Ed, do you think that Trump will be a net positive for American and global growth?

ED FRANCIS: I haven’t got a clue if the honest answer. I don’t think anybody really does. The market’s responding so far in a way that suggests that a net positive certainly for the US, less obvious globally. I think linked to the populism theme, the interesting medium-term thing is what happens to global trade? So global trade has been a strong support to emerging market growth and a modest support to developed market growth over the last 20, 30, 40 years, but it hasn’t benefited the middle classes or it hasn’t benefited 80% of the population in the West. And so the whole populist revolt that we’re seeing when there’s been no real improvement in net real incomes for a large swathe of the population is perhaps unsurprising. But that turn against free trade protectionism, I think really interesting to see how that pans out. But certainly the rhetoric so far suggests that we may be past peak trade – 30% of GDP is traded today, that’s a peak number, are we on the way down?

ROBERT PESTON: I mean it’s very interesting that the Prime Minister just a couple of days ago in the Guildhall at the Lord Mayor's Banquet was talking about the need to defend globalisation, defend liberalism, defend free trade. She plainly feels that it’s very much under attack from populous politicians, and let’s be clear Donald Trump’s talked about essentially putting barriers to trade with Mexica, with China. How worried should we be, Leon, do you think that the era of freer trade is passed?

LEON CORNELISSEN: I think we have to be very worried. And the amazing thing is that the market is now stressing the likelihood of fiscal stimulus. But for fiscal stimulus he needs Congress. And what happened to the tea party deficit is my question. He has a narrow majority in the Senate. So probably this fiscal stimulus will come but won’t be that impressive as suggested. But he has a lot of leeway in international trade because he can tear up trade agreements without the need to consult Congress. So there he has a lot of room for manoeuvre, and there are certainly huge risks. And even Europe is at risk. Look at Germany who have a current account surplus of about 9% GDP, already mentioned in earlier reports in America.

So I would say the climate for free trade is in danger at the moment. And it won’t take much time to test the policies of Trump. Look at the yuan development. It’s already depreciating rapidly. So that puts pressure also on the new administration to exit.

ROBERT PESTON: If we then look at political risks in Europe. We’ve got a whole series of votes coming up here. We’ve got the Italian referendum coming up; we’ve got elections in the Netherlands; we’ve got elections in France and Germany. What is your own current assessment of the likelihood of the kind of shock that we’ve seen in America and then what impact – so many people are talking about an increased probability for example of a Le Pen victory. Plainly, she’s very anti-Euro zone, very anti-EU, many people would say if she were to win frankly all bets are off in terms of the sustainability even of the EU project. How worried should we be about that?

COSIMO MARASCIULO: I think we should be worried in a way, because as we were saying before we live in strange times. It’s not only Trump, there have been different events. And the truth of the matter is that there are people that did not feel fully the benefit of the globalisation and global trade, did not fully feel the benefit of even the EU. And probably politicians and whoever be to slow in explaining to these people why the quality of life is better now, that we live in a world with more globalisation. And I’ve not heard anybody in the big party, in the establishment parties to try to do a reality check on why globalisation did not work. Try to make a reality check on how we need to change in the current economic framework to make a larger share of population happier about the current situation. So this opens the door to this anti-establishment party to gain some more consensus.

ROBERT PESTON: In Italy if Renzi loses his referendum can he survive?

COSIMO MARASCIULO: It was interesting because from a, sometimes investors look at it as sort of a kind of black and white binary event. So if there is a yes vote all the problems for Italy will be solved. If there is a no vote it will be the end of the euro area as we know it. But actually the reality is much more in the middle. Probably he will still survive. He will try to change the electoral law before going into an early election. And at the moment if you get an early election in Italy and we go and vote with the previous electoral law Cinque Stelle will win, or there is a very high probability of Cinque Stelle will win. So I think that there is a broad consensus that is a no vote they will need to change electoral law before going into early election.

So I would say that for, if you look at the serious events that you mentioned before, probably the French election is the one that we should look at with more concern.

ROBERT PESTON: Anybody else want to pick up on the risk of Le Pen?

HETAL MEHTA: I was going to say that obviously people who’ve been looking at opinion polls, whether it was the UK general election, Brexit or Trump, clearly would have to question whether we can trust the polls. Now, looking at Le Pen, she’s still far behind if it’s a run off between herself and Alain Juppé. I think what we’ve learned over the last few events if you like is that the margin of error in these polls is much larger than anyone has previously anticipated. Even the polling companies that try to correct themselves in their methodology, I think we just have to place less faith in these. But for Le Pen to come in I think it’s still very difficult. The established parties are likely to club together as we saw previously when Front National made it into the second round, and so certainly the probabilities have gone up in the sense that people may feel emboldened to vote for Front National.

ROBERT PESTON: And there are a lot of very angry French people.

HETAL MEHTA: There are, and French unemployment has not really improved at all in the way the rest of Europe is starting to see some signs of recovery. We’re seeing very little sign of that in France. And the discontent is clear. But I think for the established parties they’re very likely to club together and keep her, keep Le Pen at bay.

ED FRANCIS: I just think that whole theme of how far does this populous thing go, it gets expressed in different countries or different systems is obviously very varied, but how far does it go? Because there’s just a very large swathe of the population that, not that it doesn’t feel as though it’s benefited from globalisation, real GDP growth, it hasn’t benefited, and so that gets thrown into redistribution of income etc., but what do we do to make people actually benefit from the system as it stands today if something structural isn’t done there that this sort of stampede of populism does feel as though it will continue and grow over the next decade.

ROBERT PESTON: Now, one of the things that Cosimo, you touched on at the beginning but it’s obviously of massive importance to investors is whether this is the end of the decade’s long bull market particularly in sovereign debt. Do you think we are at a genuinely important turning point here?

LEON CORNELISSEN: That’s very hard to judge at the moment. That’s very hard to judge. Because much depends also on the policies in US, and we are not sure where their priorities are lying of the new administration.

ROBERT PESTON: As you say we’ve got a President Elect who’s said a number of things, some of them quite extreme during his campaign. We don’t know how much of it he’s actually going to enact. And you’re also right, we can’t be sure how the House of Representatives and the Senate are either going to facilitate him or box him in.

LEON CORNELISSEN: If they’re like here, the tax cuts of course but they probably won’t like the blow up of debt. So it could all turn out to be very moderate stimulus, and then on a global level you’re talking about much. And then of course we have Japan, with very interesting measures by the Bank of Japan, the yield curve control. So where basically you’re fixing long-term yields to zero and inviting the government for massive fiscal stimulus, but we haven’t seen anything. And referring to the French elections, you would hope that Germany would insist some stimulus. There is a likelihood because there will be elections in Germany so probably there will be tax cuts, but nothing impressive. But basically you should advise them help France and get more fiscal stimulus, and then it could be the beginning of a turning point in global yields.

ROBERT PESTON: But you think it’s too early to be definitive, because quite a lot of people have called the turn but you think it’s a bit premature.

LEON CORNELISSEN: It’s a bit premature and there’s also a counter, of course the rise in protectionism will help inflation, the bad form of inflation. And then a free for all in the coal, oil, energy sector in America that will push down the oil prices. They’re also important for global inflation development, so there you have.

ROBERT PESTON: So you’ve got a lot of pressures, some of them operating in different directions. We’ve got the Chancellor’s autumn statement here in Britain in just a few days’ time. How much of a stimulus do you think the British government should be going for at this juncture, does anyone want to pick that up?

HETAL MEHTA: Yes, I think actually for the Chancellor this is a real opportunity to take on some long-term infrastructure investment that’s been much needed in the UK. In the immediate aftermath of the financial crisis it was very easy for the government to cut back on the long-term investment side to keep the deficit down. I think this is a real opportunity, particularly seeing as the economy has performed relatively well in the UK post-Brexit. So rather than tilting the mix of policies towards short-term measures such as a temporary VAT cut to offset higher inflation, or very temporary tax cuts, I think this is a real opportunity to do the longer term stuff. And in terms of how much space he’s got, we know the Bank of England’s done QE, £60bn worth that they’re doing currently until March. And that buys them a fair bit of fiscal space. Even if they did 1% of GDP spread over the next three years that would be something. It’s not a big reset of fiscal policy, as Hammond first suggested he may do, but it’s certainly a good starting point.

ROBERT PESTON: Ed, how much of a boost do you think the British economy may need over the next few months and years post-Brexit?

ED FRANCIS: So much depends on how we exit. As you know, there’s so much uncertainty around the terms on which we’ll settle and whether we’ll have other blocks along the path from courts or general elections or whatever it is, so huge uncertainty. But our essential case is there’s about a 1% hit to GDP from Brexit. There’s a wide range around that, that’s our central case. And so that level, if we want to maintain our GDP path as it currently stands that sort of stimulus, and that’s pretty hard to achieve.

ROBERT PESTON: We’ve had a very sharp devaluation of sterling. At the moment British companies are absorbing – many of them are hedged apart from anything else – the increase in import prices. But I’m certainly hearing from big companies that they are going to have to put up prices very sharply in the New Year. What kind of an impact would you expect that to have on living standards and then on consumption? Because we should be under no illusion in this country, in Britain, it’s consumption that drives growth primarily.

LEON CORNELISSEN: It will damage of course the household income. So probably growth in the UK will be much lower next year than this year. So that’s clearly a negative.

ROBERT PESTON: But do you think we will just about manage to avoid recession next year?

LEON CORNELISSEN: Probably depends, and the government indeed will do some fiscal stimulus. But on the other hand as long as the uncertainty around Brexit will continue, and it could take much longer than March next year, companies will postpone making investment decisions so that the economy will suffer as a consequence.

ROBERT PESTON: Now, in this extraordinary time of uncertainty, and we haven’t even touched on risks that some people think are out there of Putin rolling the tanks perhaps onto the borders on the Baltic States or into Ukraine, where should investors in these circumstances park their money? Have you got a view, Cosimo, about where we should be looking at this?

COSIMO MARASCIULO: My word on the interest rate side, even after the recent pick-up on yields, still things look very expensive overall. We’ll see a lot of value in the breakeven inflation-linked bonds against nominal bonds. That’s a very important theme. Especially if we are this paradigm shift between monetary policy and fiscal policy, that might have serious implications for the long end of the curve. So we see a lot of barriers there, clearly in the US, because that’s where we probably will see most of the fiscal stimulus, but also in Europe if you look at valuations. We have a central bank which is aiming to achieve 2% inflation, and if you look at the whole expectations of the market we don’t see 2% priced in in the market for ever again for the next 30 years. So that’s why market is completely mispriced on inflation side.

ROBERT PESTON: So for you inflation-linked bonds would be something we should be thinking about at the moment. Hetal, do you have views on this?

HETAL MEHTA: Yes, so at Legal & General we actually own a lot of inflation- linked bonds as well, again mainly the US. I think the Europe the problem is that Italy is such a big part of the inflation market that it’s probably a risk that we don’t want to take on. But in the US I think it is worth remembering that the risks are actually two sided. Because we’re into a very long economic cycle and the risks of a recession in US now, say in any given year 15 to 20%. So whilst you’ve got the inflation risk coming in, the recession risk is something we can’t actually ignore as we get more towards the late cycle, the Fed starts hiking and so then you’ll eventually get some sort of deflationary pressures as well. So I think it’s more two sided.

ROBERT PESTON: Ed?

ED FRANCIS: So our policy advice to investors at the moment is, in a world of uncertainty, some interesting arguments about cheapness or expensiveness of inflation, but actually you can’t bet the house on a single view, on inflation or anything else. And so as uncertainty is high, and we’ve been saying this for a number of years, uncertainty is very high, it calls for very balanced portfolios. Not betting the house on any one thing, seeking real diversification of portfolios and hedging unrewarded risks. So that’s been our policy advice for some time.

ROBERT PESTON: Sorry, I’m being a bit thick here, what do you mean hedging unrewarded risks?

ED FRANCIS: So most of our clients and a lot of your viewers will be people who work for pension funds. Pension funds have embedded inflation and interest rate exposures in their liability structures. And hedging a high proportion of that, even though there’s this huge uncertainty about whether bond yields go higher or lower, we just don’t want to bet the house on a particular view. That’s hedging a lot of that exposure, and seeking very balanced portfolios to drive growth. So not just, so typically institutional investors have a very heavy concentration on the equity markets. Who knows what’s going to happen to the equity markets? So very balanced portfolios, spreading risk as much as possible as uncertainty is very elevated.

ROBERT PESTON: And do you think there is any asset class where you see value at the moment?

ED FRANCIS: So I would say all the mainstream asset classes, equities, investment grade bonds, government bonds, all the mainstream asset classes that are easy to access, that get all the liquidity are either fairly or richly priced, so nothing good value. So our work is focused on finding areas of the capital markets that are not flooded with investor liquidity. So by definition once that’s identified it becomes flooded with investor capital so you have to keep working. But certainly…

ROBERT PESTON: I’m glad you’re earning a living.

ED FRANCIS: Yes, but certainly there are currently areas of the capital markets which we believe are being somewhat starved of capital, and they’re typically the areas of the capital markets that have relied on bank funding historically, so real estate, infrastructure, debt for example.

ROBERT PESTON: What are we looking at, private placements here or?

ED FRANCIS: Typically private debt. So the public markets, there’s too much liquidity for them to be cheap, and so we’re looking for private deals in areas of the private markets now that haven’t been quickly identified as.

ROBERT PESTON: And these areas are in fact growing quite fast in Europe aren’t they because of…?

ED FRANCIS: Yes, the bank intermediation story is a big one, and so institutional capital is stepping in in significant size.

ROBERT PESTON: Very interesting, Leon.

LEON CORNELISSEN: Well I agree that given high uncertainty you need to balance the portfolios. But I think still it’s particularly interesting that European investment grade bonds and high yield bonds, because in the current circumstances ECB will probably extend its QE programme, and these markets in Europe will probably benefit. In the US, high yield and investment grade is much more uncertain. So that is kind of a niche in a market, in which of course are fundamentally viewed expensive, but perhaps there is some upside. But for the rest I agree it’s difficult finding true value.

ROBERT PESTON: Now we haven’t so far touched on China. It’s amazing that in a, you know, it’s been the big economic influence on the world for 30 years, but there are so many other things going on at the moment it’s suddenly gone down the list of priorities. But we do have the most autocratic Chinese president since Mao in President Xi. We have growth that is still being funded many people would say by unsustainable debt creation. We’ve got the 19th Congress of the Communist Party next year, which is when he is expected to consolidate, this is President Xi’s grip on power. The issue of a hard landing in China seems to be off, it’s not front of mind for investors at the moment, do you think we are entering a period of slightly dangerous complacency about China, or do you think actually it isn’t the risk that perhaps people thought it was?

LEON CORNELISSEN: In the short term there isn’t much risk, probably, because Chinese authorities would like to keep growth strong until the next party congress. So it’s a bit postponing the day of reckoning. And I agree the debt built up is unsustainable, and there seems not much appetite to deal with it in a good manner. But yes, short-term risk I wouldn’t say that high because there is top priority to get to without nasty headlines to the next.

ROBERT PESTON: So the day reckoning is a year or two away.

LEON CORNELISSEN: Exactly yes.

ED FRANCIS: I think I might have a slightly different view there. Certainly the short-term perspective I’d agree with. I think there’s uncertainty about what actual policymaking is in China, much more so that we’re used to in the West. But I think our sense is that policymakers in China actually are rational economic agents. Yes, there’s some politics that plays into their arguments but they understand the issues. Talk about unsustainable debt build up, I think there’s an understanding of what is sustainable in the Chinese system, and a willingness, an understanding of what it takes to deal with those issues. And I think we’d be a bit more optimistic about actually there’s a rational economic decision-making process that goes on in China.

ROBERT PESTON: Although that said the build-up of debt is still significant. So they may understand it but they haven’t actually challenged it as it were.

LEON CORNELISSEN: It’s perfectly rational for political reasons, but economically it makes a difference.

ROBERT PESTON: Well it’s interesting. Now if we again come back slightly closer to home. Here in the UK obviously the big issue is Brexit. Very interesting that yesterday we saw the first sign from the German Chancellor that maybe she will force Europe to think again about the nature of free movement. If free movement in its current form was reformed a bit, how much of a game changer would that be both do you think for attitudes here to Brexit, but also more widely within the European Union? Do you think it would take for example some of the wind out the Le Pen sails?

COSIMO MARASCIULO: I think it’s a bit more complicated. I think there are two things we need to keep in mind. One is when there were negotiations with Greece the Europeans have never, always want to impose tough conditions, because they don’t want it to become…

ROBERT PESTON: A precedent.

COSIMO MARASCIULO: A precedent. And second, do you remember when there were negotiations with Canada about the trade deal there was a small region in Belgium that was blocking the whole issue. So I’m afraid that it’s not about, clearly she’s very influential, Angela Merkel, and she’s clearly the probably, in two years’ time we have big question marks on the different leaders in Europe. But we know with a reasonable probability that she will still be there. So she will be one of the pillars of the European Union. But unfortunately negotiations with Europe are never easy and straightforward, so I think it will be tough regardless of some positive rhetoric that we heard more recently.

ROBERT PESTON: And how much time do you think investors and companies, how much time do you think they’ll give our Prime Minister to say a little bit more about what she thinks Brexit means? Because I think for most people what’s been really conspicuous is the absence of either detail of the negotiating strategy or indeed absence of what the destination is for Britain outside of the European Union. We still don’t really know what they’re striving for, for example, in terms of a relationship with the European single market or the customs union. These are big uncertainties.

ED FRANCIS: How much time? Well I think rational investors and companies among them are braced for many years of uncertainty. And not expecting great clarity in the next month or two months as the rhetoric in certain parts of the system demands.

ROBERT PESTON: And how much does that increase effectively the cost of capital for businesses here? Because it’s a big risk isn’t it?

ED FRANCIS: And that’s the hit to GDP that we’re expecting. So foreign direct investment down, just rationally people will invest less in our country while there’s that uncertainty. But you can’t wave a magic wand and create certainty for a number of years.

ROBERT PESTON: Leon, how serious is this for us do you think here in this country?

LEON CORNELISSEN: Well it’s pretty uncertain and time is working against UK of course. And probably also a likelihood of a new election is arising because the government is divided. A clear strategy, if even the government doesn’t have a clear strategy then it becomes difficult.

ROBERT PESTON: Hetal.

HETAL MEHTA: I actually think a lot of investors have already declared that Theresa May’s fast running out of time. If you look at the value of sterling right now markets are clearly pricing in something that’s a quite significant shift in the structural relationship of the UK with Europe and saying we don’t buy into the idea that you’re going to have a constructive relationship otherwise we wouldn’t be seeing the exchange rate where it is. So actually I think Theresa May’s really running out of time quite fast before she has to give some clarity.

Europe has been demanding since the day of the referendum or the day after for us to trigger Article 50, because until we do so, so many of the processes – it’s never been done before in Europe – so many of the processes that need to take place are completely unexplored. And until we actually start doing this the negotiation’s not even at the top level, but at official bottom level can’t really start if you don’t know who you’re negotiating with. And I think she’s getting pressure from investors as well as politicians to just get on with it.

ROBERT PESTON: One of the things I’ve been struck by is how little movement there’s been in gold over the last recent period. Because you’d think in a time of genuinely huge uncertainties, including uncertainties as I say of a sort about how will Putin react to a US President who’s said he’s much more ruthless, they’re going to put America’s interests first, which rather suggests for example in regards problems on Europe’s borders as more Europe’s problem than America’s problem. Are you surprised there hasn’t been more of a rise in the gold price in these circumstances?

COSIMO MARASCIULO: It’s a kind of tug of war, because in a way more political uncertainty and higher inflation expectations should be positive for gold. At the same time if there is, it’s true that there is a paradigm shift between monetary policy and fiscal policy, and there will be less of a currency devaluation attempts from central banks and currency basing. That was one of the reasons people were buying gold.

ROBERT PESTON: Would you, just out of interest on balance where would you go on that?

COSIMO MARASCIULO: I think we are still, we are really as I said a turning point in monetary policy. So I think we will see probably a more hawkish Fed, more hawkish ECB. I think people have, central banks have realised that actually negative interest rates or a super flat yield curve, very low risk premium is not necessarily a good thing for the economy. And that’s why I said it began even before Trump won, because when we had the September monetary policy from the ECB there was Draghi reading the G7 statement in which they were saying that actually fiscal policy will be important. So it’s a transition and clearly the asset class needs to be repriced into this new environment.

ROBERT PESTON: Yes, anybody else like to pick up on those issues?

LEON CORNELISSEN: The market seems to like the increased geopolitical risk at the moment, so as long as that continues.

ROBERT PESTON: Why is that though? It’s curious isn’t it?

LEON CORNELISSEN: It’s a bit curious yeah. Just stressing the fiscal stimulus at the end of the overly lines of monetary policy and. So there’s much…

ROBERT PESTON: Because it was really fascinating that overnight on the night of the election initially the signals were for an incredibly sharp fall in stock markets for example. And there was, and then it just bounced back. Where is the demand coming from?

COSIMO MARASCIULO: I think people were, after Brexit people were over-hedging their equity exposure or risk exposures. So after Trump victory people who were just closing, there was a lot of flows coming into the market. You need sometimes for the market to settle down.

ROBERT PESTON: Now I’ve got a couple of questions in from people watching. This is from someone called Med at Darwin Wealth, and he’s saying would the potential breakdown of the European Union offer a more stable environment for the UK in terms of GDP? I’m not sure I quite understand that but I mean I can sort of see how when there is mess elsewhere the mess in Britain doesn’t look quite as bad. It’s this argument that if you’re not the ugliest model in the room that’s good news as it were. But presumably you would all take the view that the breakdown of the EU would be pretty disastrous for global GDP.

HETAL MEHTA: Oh it would, I mean certainly given how much trade the UK does with Europe, 50% of our exports go there, it’s really not in our interest to see the rest of the EU economically that weak. We saw the same after the sovereign debt crisis in Europe. The UK just didn’t pick up as it should have done at that stage of the economic cycle.

ROBERT PESTON: Although it was quite interesting, I mean this ugliest model sort of works in terms of capital flows because it was quite interesting that despite our own structural debt problems nonetheless things look worse in Europe, and therefore investors were still prepared to put money in Britain, which was definitely a help at the time. And then I’ve got a second question, which is do any of you have a view about whether particularly this row over Brexit, do you have a view about whether we are going to see the breakup of the UK, Scotland succeeding, and how damaging that would be both, obviously politically it would be a huge shock, but economically how serious that would be.

ED FRANCIS: No strong view at all. The only observation I’d make is that there’s something quite significant that’s happened to the oil price since last time the Scottish vote was cast. And I would expect that to be quite a significant.

ROBERT PESTON: I mean roughly speaking Nicola Sturgeon would probably not be well advised if she wanted independence to have a poll any time soon, just because actually the argument for Scotland being a sustainable economy is harder to make.

ED FRANCIS: Required a different oil price.

ROBERT PESTON: Right now with such, with where the oil price is.

ED FRANCIS: Exactly.

ROBERT PESTON: You only have to go to Aberdeen to realise quite what the challenges are at the moment, very high and rising unemployment. We haven’t got long now, and I just thought if we could just, if I could just ask all of you a very simple question, which is if you look let’s say over the next year or two, do you think we should be preparing ourselves for other big shocks, or do you think that we’re now, we’re at the end of the big unexpected changes and we’re not going to sort of muddle through for a bit? What would be your view Cosimo?

COSIMO MARASCIULO: I would go for the first one.

ROBERT PESTON: You think we’ve got to brace ourselves for more.

COSIMO MARASCIULO: We need to be open minded as an investor. Maybe you should not look at the, when you look at your charts and you see, you should not look at the last 12 months, but extend it to a longer period of time. So a lot of things can happen.

ROBERT PESTON: Hetal?

HETAL MEHTA: I think with just the sheer number of events that are coming up, you only have to call one of them wrong before you see quite a significant impact in markets. My base case would be most of these hurdles are passed, but just. But I have to say the conviction in that has clearly been shaken quite significantly.

ROBERT PESTON: Ed?

ED FRANCIS: Well I think we have seen political shocks, but actually we have broadly speaking muddled through. Economies have muddled through. And I think our expectation is there’ll still be, again this populism thing etc. will create tension and a lot of headlines. But policymakers are still generally doing rational things supporting a muddle through scenario. So that’s still what we’d expect to see.

ROBERT PESTON: Leon?

LEON CORNELISSEN: Political risks have increased, so I would say prepare for more turmoil. It will also be very interesting to watch the outcome of the German elections.

ROBERT PESTON: Yes, I mean we haven’t really touched on the German elections. It sounds to me as though you’re not, because many people would say that Angela Merkel is the in a sense pillar of stability in a very uncertain world. You obviously worry that she may not be around after the elections.

LEON CORNELISSEN: She’s tired, and if you look at the opinion polls, but who is looking at opinion polls nowadays but OK. Then a grand coalition still has a majority of 55%. But I would say 55% isn’t that comforting, so are we heading for a three party cabinet in Germany? It’s all very uncertain at this moment.

ROBERT PESTON: So on that cheery thought I think we’ll wrap up what was an absolutely gripping and fascinating discussion. Lots of that to pick up in our own private conversations. I have to say I am probably the one person in this room who is unbelievably profoundly grateful for Brexit and for Trump because it keeps my daily job very interesting indeed. Thanks very much to my brilliant guests. We’ll be back in just a few minutes to talk about actually a big subject that we talk about a lot here on asset.tv, which is the future of pensions. And of course the future of pensions has had a, it’s been influenced tremendously by both the Brexit vote and the Trump elections. So see you in just a few minutes.

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