Europe: Chinese whispers drown out Brexit noise

But then there’s the chance of a no-deal…

That’s not to say that the UK’s neighbours are completely nonchalant about Brexit. While not necessarily the key driver behind Europe’s stock market performance, a no-deal would be a big deal for the continent – economically and politically.

Lilian says, “Europe is a close trading partner of the UK and many European companies make their products, or parts of their products, in Britain before exporting them elsewhere. That is currently cheap and straightforward to do but could become much more troublesome if we had a no-deal Brexit.

“Depending on the terms of the UK’s exit, these companies could end up having to pay tariffs to move their own products across borders or reshuffle their operations to accommodate the new UK-EU relationship. This creates a huge, extra challenge at a time when they need it least – because of their struggles with reduced demand from China.”

Cracked China?

One of the most important examples of Europe’s strong links with China comes from its largest economy – Germany, which only narrowly escaped a recession last year. In 2018, the 30 companies in Germany’s DAX stock index made 15% of their revenue, or €200 billion, from China, according to the Federation of German Industries.

But there’s hope.

While China’s economic growth has slowed down – at 6.6% last year, its slowest since 1990 – there are now signs of stabilisation.

The Chinese government has put a number of measures in place to give its economy some much-needed support. This includes cuts to income taxes and VAT, some reductions in import duties and lower short-term interest rates.

Perhaps the biggest development to bolster China has been gradual progress in its trade talks with the US. A US-China bilateral deal is looking increasingly likely and we could even see a summit between presidents Trump and Xi by June.

In fact, while the potential for a protracted and fractious trade war was considered a key market risk last year, falling levels of bellicosity on both sides are a major reason behind this year’s share price recovery.

Lilian says this all has potential to change Coutts view on Europe.

“We are keeping a very close eye on developments in China. If it improves significantly, our outlook on Europe could improve too. And although it remains to be seen whether the Chinese government’s strategy will work, it is certainly not beyond the realms of possibility.

“We remain agile as investors and ready to move quickly as the economic landscape changes.”

When investing, past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.