On December 1st 2019 a new European Commission begins, setting an agenda that presents opportunities and threats within European equities. The LF Lightman European Fund is positioned to benefit from a series of catalysts driven by European policy in the coming year.
Co2 reduction and a Carbon Border Tax
Europe is aiming to sharply reduce CO2 emissions – by up to 55% by 2030. The availability of Co2 certificates is being reduced and Co2 prices are rising. This is presenting an advantage for the most efficient EU operators in heavy industry, be it in steel, chemicals, aluminium or cement. The cost of production is rising for bad operators, enabling market share and possible margin gains for businesses with the cleanest and most efficient processes.
A proposed Carbon Border Tax is a further catalyst for best in class heavy industry operators, particularly in steel. EU steel has been severely threatened by cheap foreign imports in recent years. EU regulations have forced EU steel operators to invest in cleaner processes but this has come at a cost versus unregulated and often subsidised foreign imports. A carbon border tax will force foreign steel producers to pay a carbon price before exporting their product into Europe. This will put EU steel on a level playing field with the rest of the world. When emissions are considered as part of the cost of production, a small group of EU operators stand among the most efficient in the world.
Subsidised electric / hybrid vehicles
EU car makers must reduce the average Co2 emissions of their new car fleets from a target of 130g/km today to 95 g/km by 2021. Huge investment by the industry over the last two years has resulted in the development of a large number of low emitting models due to hit European markets in 2020-21. Governments are likely to subsidise sales in order to speed up the Co2 reduction process. Those car makers and parts companies with the best low emission products will see a step up in revenue and market share as the EU fleet is renewed.
German Finance minister Olaf Scholz has indicated (FT.com Article here – Germany will consider EU-wide bank deposit reinsurance) Germany’s willingness to push ahead with banking union, following the new Commission’s proposals. Whilst it is early in the process, Germany appears to be giving way on the critical question of a common European deposit insurance scheme. This was the key roadblock in the way of completing Europe’s banking union.
Today most bank deposits are effectively ringfenced within countries. Banking Union will allow deposits to move freely around the Eurozone. Excess German deposits could be used to fund higher returning lending in the south of Europe for example. This ought to have a positive impact on European economic growth and incentivise cross border banking M&A.
A growth friendly fiscal stance
Both the ECB and the European Commission are advocating increased fiscal spending. Some of this fiscal expansion may be deployed under the cover of the Commission’s Green Deal. Subsidies for electric vehicles for example would amount to a potentially significant stimulus given the multiplier effects of the car industry on EU manufacturing.
European unemployment benefit reinsurance. A common consolidated European corporate tax base
A pooled unemployment benefit scheme appears like a long shot for now, since it amounts to a large step in the direction of fiscal union. But it remains one of Ursula von der Leyen’s stated ambitions. A common European corporate tax base is another key proposal. This may not be good news for Ireland, parts of Eastern Europe and Scandinavia, but it is constructive for core Europe.
Any step in the direction of corporate tax harmonisation, pooled unemployment benefits or banking union ought to be bullish for the Euro. These are all signs that Europe is addressing some of the fundamental questions over the structure of the single currency.
A reinforced European border and coast guard agency
Europe is aiming to deploy 10,000 new border and coast guards by 2024. This is a new uniformed service named Frontex. Recruits will be trained in 2020 with the first deployment in January 2021. The aim of this standing corps is to be a mobile support for member states. Italy in particular has faced the brunt of recent migrant flows. Europe’s lack of support for Italy has been a central plank of Salvini’s criticism of the EU. The scale and effectiveness of this border force may have an impact on the growth of populism in the coming years.
The LF Lightman European Fund is positioned to benefit from a wide variety of policy proposals from the new European commission.
Banking Union is a key catalyst for our bank holdings. Incentives to shift car buyers towards electric and hybrid vehicles will drive returns for our auto exposed holdings. Finally, binding carbon prices will provide significant opportunities for our investments in steel, chemicals and select industrials.
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