Joachim Fels, the London-based global head of economics at Morgan Stanley, told delegates at this year’s PERE Global Investor Forum in Amsterdam why he had changed from being a pessimist into a long term optimist about Europe’s economic prospects.
In an opening keynote address at the Hotel Okura on October 25, Fels first presented a cautionary analysis of the world. Then he explained how reforms and improved competitiveness in Europe had persuaded him to be positive about the region.
He said that worldwide, growth was bumpy, below par, and brittle – a “Triple b” recovery in other words. In India, the government-led consumption growth model was broken, as was the commodity-led growth models in Brazil and Russia. Meanwhile, Chinese exports had fallen for several months in a row. In each of these countries, transitions to alternative models hadn’t yet been achieved.
Indeed, as if private equity real estate professionals weren’t already spooked enough by these worrying indicators, Fels suggested that for virtually all of next year the world would continue to be in the “twilight zone”. “You could even call this relative economic stagnation. As well as growth models in emerging countries being broken, in the advanced economies there have been major spikes in policy uncertainty such as the ‘fiscal cliff’ in the US, which implies another deep US recession. In Europe, the Greek restructuring also added to this feeling.”
In order to prevent a global recession, central banks in mature economies were using quantitative easing while in emerging markets such as China, structural and social security reforms were needed to enable consumer-led growth. In Brazil, infrastructure investment was needed to support non-commodities manufacturing, while in India tax reform was needed to stimulate private sector investment.
However, on Europe the assessment was surprisingly upbeat. Fels said beginning ten years ago, he used to be pessimistic about Europe’s future when France and Germany failed to keep their budget deficits to below three percent. The resultant coalition, he said, had led to much higher budgets that he thought could eventually lead to a euro break-up.
“We got pretty close. However I am now much more optimistic on the future of Europe. Deficit countries are regaining competitiveness, for example in Spain where costs are down 10 percent from the peak. At the same time, the surplus countries such as Germany are seeing costs increase.” He argued governments now understood that they needed to create banking and possibly future fiscal union, which had become clear over the summer. Meanwhile, the European Central Bank (ECB) had stepped up as lender of last result for governments, willing to buy government bonds for countries that were subject to an “adjustment programme”.
“The risk of European divorce – or break up – has been reduced,” said Fels. “We now have a much better chance of ending up in the European renaissance scenario. Countries are regaining competitiveness and Spain, Portugal and Ireland have pushed through major reforms that would not have happened without this crisis and could lead to growth. That is a reason to be a long-term optimist on Europe.”
Overall, he had a positive message for delegates. “In some parts of the world, real estate is starting to pick up. If central banks keep doing what they are doing, they will push asset prices higher amid asset-type inflation. I think that in those countries that did not have a huge real estate bubble in the first place, this is where one sees clear sign of a pick-up in real estate. I have some doubts that in some countries that went through a real estate bubble, we will see another real estate bubble any time soon. Bubbles are more likely in say equities or in some emerging markets.”
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Second day innings
Also speaking at the PERE Forum, Mary Ricks likened the deleveraging process in Europe to being in the second day of a five-day Test cricket match. The president and chief executive officer at Kennedy Wilson Europe was asked what stage the region was at by Russell Platt, co-founder of Forum Partners in a panel session called “Global opportunities in equity and debt”. Ricks said she had seen a lot of sales of distressed debt in the last two quarters, and that there was now loan-on-loan financing available, unlike a year ago. “The market is evolving. It may be evolving a little slower than originally anticipated but that is because of government involvement that has pushed off the deleveraging process.” When asked which particular market excited her, she answered Ireland. “Peak-to-trough the real estate market fell a long way, but it is bottoming a little.” She added Kennedy Wilson was close to investing in a multi-family property in Ireland. The firm is in talks to buy it for the price that a developer paid for the land in 2004. At press time, the firm was also in talks to buy State Street’s HQ in Dublin.
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