Europe Feels the Love From Ukraine -- and Markets, Too
European stocks are quite the flavor of the month as prognosticators look toward 2014.
The popular upheaval that has seized the center of Kiev had an unlikely catalyst: Yanukovych’s last-minute failure to sign a vague association agreement with the European Union. International protocols of this type are a subject editors generally despair of inducing readers to care about. When was the last time a hot story about the World Trade Organization or multilateral talks on climate change drove traffic for anybody?
The agreement, which was meant to be signed at an EU summit last month, had few immediate implications. Ukraine’s actual membership in the European family would have been decades away at best. The promised free trade would doubtless have been subject to many ifs, ands, and buts as powerful lobbies in the West maneuvered to block cheaper Ukrainian farm products and steel. Brussels, overstretched by successive crises in member countries, put no cash incentives on the table for its hard-up Eastern cousins.
Russia, by contrast, has a great deal to offer Ukraine, aside from ancient cultural ties. (Russian is still more commonly spoken than Ukrainian in Kiev, not to mention in the industrial heartland to the east.) Ukraine’s trade with other ex-Soviet countries exceeds trade with the rest of Europe by one-third: $59.8 billion vs. $44.9 billion last year. Russia has historically provided Ukraine with natural gas at deep discounts, and promised a still better deal if Kiev signs up to its customs union with Kazakhstan and Belarus.
Ukrainians went to the barricades for the European choice nevertheless. That says something about Europe that you won’t often hear in the US business press, which loves to condescend to the Old World as a sclerotic fogey cussedly determined to resist the modern gospel of growth and efficiency. This diagnosis seemed brilliantly confirmed two short years ago as bond investors revolted against one continental country after another and the grand euro experiment looked to be imploding.
The Kiev protestors obviously see a very different Europe. They are struggling, if one may read their minds from afar, for spiritual links to a continent that seems to uphold humanity and human happiness as its paramount virtues. Where egalitarian governments are willing to trade a bit of GDP expansion for social cohesion and contentment. (Eight of the top 10 nations in the UN’s World Happiness Report are European. The US ranks 17th, behind Costa Rica, Panama and, believe it or not, Mexico.)
Europe’s burial of age-old national hatreds since the Common Market was founded 60-some years ago, and its generous expansion to the ex-Communist East over the past two decades, also create the impression of a bona fide internationalism that treats the rest of the world as an equal and wants to engage it, not dominate it. It is hard to imagine the populace of any Latin American country rioting in order to be closer to the United States.
Can Europe’s virtues be set to outshine America’s in financial markets, too? They can, if the prevailing mood on Wall Street is correct. European stocks are quite the flavor of the month as prognosticators look toward 2014. The most broadly invested European equities ETF on US markets, Vanguard FTSE Europe (NYSEARCA:VGK), has bested the S&P 500 (INDEXSP:.INX) since July 1, returning 14% compared to 10%. A strong majority of pundits expects that outperformance to carry into next year.
A Reuters survey of 350 investors worldwide predicted another 14% gain for European shares during 2014, compared to an 8% rise in US equities. Separate outlooks from half a dozen bulge-bracket banks – Morgan Stanley (NYSE:MS), Citigroup (NYSE:C), Credit Suisse (NYSE:CS), Barclay’s (NYSE:BCS), and UBS (NYSE:UBS) – came in with similar numbers. Some of the most beaten-down markets are now the hottest. Reuters respondents expected a 27% jump in Italian stocks next year. In Spain, giants of world private equity like Apollo (NYSE: APO), Blackstone (NYSE:BX) and Goldman Sachs (NYSE:GS) are jostling to see who can throw more billions into hotels and other real estate.
There is a bit more at work here than the law of what goes down must come back up again. Europe, in its impenetrable Kabuki way, has substantially pulled itself together since the dark days of 2010-2011. The European Central Bank has started acting like one, sending markets a clear signal that core nations like Italy and Spain are indeed too big to fail. Both countries have responded with internal improvements, slashing budget deficits and reforming labor markets that are at the root of their ruinous unemployment. Italy seems at last to have parted ways with perennial prime minister Silvio Berlusconi, the architect of its decades of decline.
None of this makes Europe a promised land, except perhaps in comparison to serially misruled Ukraine. But US policymakers struggling with the monsters of income inequality and health-care delivery may find it useful to know that there is a viable alternative across the sea. Investors may find it useful, too.
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