Behind the numbers is a more serious issue

In financial markets we often focus on the big picture of numbers, such as GDP, interest rates, leading indicators and so on. In doing so, we often forget that the real economy is actually a collection of people and their business activities. The measurements of course matter, but what drives them arises from the real world.

Ignoring the real facts on the ground is a common error in financial markets, whether relating to forecasting economies or modelling risk, we often see the world through purely numerical eyes and forget that behind those numbers are real companies and consumers.

We raise this in the context of interest rate policy in Europe, where negative interest rates have failed to prevent an ongoing slowdown, and further easing is planned. The issue is that the difficulties faced by the Eurozone economies are partly caused by the policy of ultra-low rates and partly structural. In neither case will more free money help.

Europe’s real problem is more fundamental and cannot be simply cured by further doses of free money. The products that have been the core of Europe’s production and exports are rapidly becoming redundant. Demand for diesel powered passenger vehicles is falling. Diesel was sponsored as a more environmentally friendly fuel source, largely for protectionist reasons, by European governments. Unfortunately, this proved not to be the case and as a consequence demand is declining rapidly. Two factors exacerbate this trend, China’s move towards domestic brands and the potential of Brexit.

Capital goods exports to China have also been weak, reflecting China’s move towards domestic suppliers as well as its move towards a more consumer focussed economy.

The result of these trends is that Europe’s big drivers of past growth are now behind them and a new economic model may be needed. Interest rate policy has prevented the normal process of creative destruction. Resources are not being recycled effectively into the industries of the future and away from those of the past.

Europe thinks it needs a new model and we can already see how that might look. There has for some time been talk of fiscal policy to complement the zero-interest policy. Europe has a long history of industrial policy, giving government support, both financial and non-financial, to gain an advantage in certain industries, albeit with mixed success. It seems clear that the ground is being laid for some form of European green new deal in which investment into the new energy sector is further accelerated.

We have little exposure to Europe’s struggling economies, our European equities being focussed on growth areas such as new energy and healthcare. We are however, quite vigilant as to the implications of a change away from monetary to fiscal policy as this might have material effects well beyond the immediate impact on near term growth, on bond yields and currencies.


The value of stock market investments will fluctuate and investors may not get back the original amount invested.

Forecasts are not reliable indicators of future performance.

Important Information

For Investment Professionals only. Not for onward distribution. No other persons should rely on any information contained within this document.

Source for information: Miton as at 02/10/2019 unless otherwise stated.

The views expressed are those of the fund manager at the time of writing and are subject to change without notice. They are not necessarily the views of Miton and do not constitute investment advice.

Miton has used all reasonable efforts to ensure the accuracy of the information contained in the communication, however some information and statistical data has been obtained from external sources. Whilst Miton believes these sources to be reliable, Miton cannot guarantee the reliability, completeness or accuracy of the content or provide a warrantee.

Issued by Miton, a trading name of Miton Asset Management Limited the Investment Manager of the Fund which is authorised and regulated by the Financial Conduct Authority and is registered in England No. 1949322 with its registered office at 6th Floor, Paternoster House, 65 St Paul’s Churchyard, London, EC4M 8AB.