Emma Wall: Hello and welcome to the Morningstar Series, "Why Should I Invest With You." I'm Emma Wall and I'm joined today by Francesco Conte, Manager of the JPMorgan European Smaller Companies Trust.
Hello, Francesco.
Francesco Conte: Hello, Emma. Good morning.
Wall: You have said something quite positive about European stock markets and that is that we're finally emerging from the mess that was 2009. And I suppose my question is going to flip that. Why has it taken so long? Because in the U.K. and the U.S., we emerged some time ago.
Conte: Well, I think the fact that you have 27 different economies meant that solving the problems of the financial crisis took a lot longer than it did in the United States. And so, it's only really since QE started a couple of years ago, where Europe has finally started to emerge out of the mess that the financial crisis entailed. Whereas the U.S. started QE long before that and so they had the benefit of that.
Wall: And is it all QEs, is it the central bank, the ECB that has helped to move Europe into this recovery. Or are there other factors at play?
Conte: Well, I think QE has helped because it has made the bond spreads much narrower. The previous problem was that when Greece elected Syriza that had a – spread like wildfire throughout the bond market. And so, Italy and Spain came under enormous pressure the two-year bond yield in Italy and Spain, I think it was 2011/2012 was around 7%. I think perhaps if there had been QE at the time, that might have helped to keep those spreads narrower.
Having said that, Europe always thrives on a good crisis and so Italy implemented some good reforms. In some of the countries in Europe, such as Italy, you need a good crisis. I mean, we saw the benefits of what happened to Ireland. I mean, Ireland is a phenomenally successfully economy now. Spain has been growing 3%, I think for three years in a row now. So, you need a crisis in order to reform, but if you do reform, the price is enormous on the other side. So, I think that's – things have been moving in the right direction.
Wall: And how much does politics have to play because we did see European markets bounce this year after the successful campaign of Emmanuel Macron in France and that has provided a real tailwind. Will politics continue to do so in Europe?
Conte: Well, I think the great fear was extreme bright voting in Europe. So, initially at the beginning of the year we had the Dutch elections, then followed by the French, followed by the German, possibly the Italians, either end of the year or next year. And I think what we've seen is because of Trump and I think to a certain extent Brexit, Europeans have really come together.
If you think of the European project I think what people often forget is that really it's a project that was trying to avoid the war and – or third world war at its core and really it was trying to bound the countries together. So, when you have if you go to Scandinavia right now, Finland in particular, well Sweden as well, Sweden is rationing up its defense spending enormously at the moment. So, you have, I suppose they are afraid of the Russian…
Wall: Threat.
Conte: Threat, but they are also now equally fearful that NATO may not be there to support them. So, Europe, how do you say they feel a lot more comfortable that Europe will support them than these other perhaps super national entities. So, Europe has really come together through this and what's – I'm going to say Europe I'm not talking about the leaders, I'm talking about the people and what you saw overwhelmingly is people voted for the center in Holland, voted for the center in France, it looks possible likely that Chancellor Merkel will be reelected again. If it's not her, it's someone from center left.
And then in Italy there was this huge threat of Mr. Grillo party the Five Star Movement, but at the recent provisional elections they really did appallingly badly. So, one would say at the moment the odds are that Mr. Renzi who is a centrist like Macron should be or should win the next elections. So, if you have then a Chancellor Merkel, I was about to say Kohl I don't know whether that was in the history.
If you have a Chancellor Merkel with Macron who is a reformer, with Renzi who is a reformer, you could really go into a very, very stable and very productive period for the European Union and that has not been the case perhaps since the early 90s. So, we're really talking more than 20 years ago since we last had such a potentially, potentially stable situation.
Wall: Francesco, thank you very much.
Conte: Not at all, thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
