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Super-EU state or bust!

Raphael Fiorentino
4th May 2020 - 3 min read

It will be a while before the true cost of the blanket lockdown across most of Europe is known. We do know however that countries with higher Covid-19 fatality rates have typically seen their equity indices underperform by ca. -7% for each extra 100 fatalities per million above Denmark’s rate (see chart below).

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We also know that “Emerging Europe” countries have been suffering fatality rates 7 times lower than West European countries, and that somehow government size (which we proxied using the economic freedom index scores for fiscal health, tax burden, and government spending) correlates strongly with fatality rates. In other words, (EU) countries that tax more and are fiscally incontinent produce(d) higher Covid-19 fatality rates, despite higher government (incl. public health) spending (see graph below).

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This seems to be an EU peculiarity (especially for those at the top of the chart and above the line), as applying the same model to countries outside of the EU (with often much poorer fiscal health but much lower tax burden and government spending, e.g. USA, Japan, Korea, Taiwan) would make the relative EU outperformers (from Portugal, to Norway, to Slovakia) look like laggards.

Since higher fatality rates means longer lockdown periods, the West European countries with the weakest fundamentals will also be the most hit economically. Against this backdrop, the strategy of “above the line” governments (e.g. France, Spain, Italy) is to have another push toward the holy grail of free riding by “l’Etat”: debt mutualisation with “der Etat”... or bust. Whether this eventually leads to a super-big EU government or an implosion of the eurozone, either way economic growth and corporate profitability look relatively unpromising for the eurozone and its periphery.

Listed EU equities whose destiny depend in large part on “above the line” governments (proxied in the graphs below by financials, utilities, telcos, broadcasters, car makers, aerospace & defence in France and the UK – cap-weighted) continue for now to pay the price with both underperformance and poor fundamentals.

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Unsurprisingly then, a rapid scan of “interesting” investment candidates in the eurozone (i.e. attractive fundamentals and interesting investment controversy) returns 19 firms with strong business franchises and high geographic diversification (see filters set in the top bar of the screenshot below, that we complemented for illustration purposes with some fundamental, macro, and quant filters).

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Broadening the stock universe to, for instance, include North America, Japan, Australia-New Zealand and North East Asia (China, Taiwan, South Korea) and further tightening the filters, for instance by only surfacing firms with net cash balance sheets, brings up 25 interesting opportunities worthy of further research.

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Clicking on any of the names brings up their detailed “quantamental”, macro, and trend-following insights and signals that led to the selection, together with qualitative (bull/bear) arguments, and a signal timeline to put the current set of signals into historical perspective (see screenshot below). All designed to be quickly absorbed for a fast, thoughtful triage to help inform and prioritise any potential deep dive.

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The filters we have used above can be adjusted to suit almost any mandate including adding proprietary data to create exclusive bespoke versions of the platform. Please reach out so our team can bring you up to speed on how Butterwire can support your existing investment process in a highly cost effective, productive manner.