LDN - Business

For investors, bloom is off Europe amid Brexit, yellow vest worries

[May 01, 2019] By Svea Herbst-Bayliss and Matt Scuffham

BEVERLY HILLS (Reuters) - Europe, long a major destination of investor capital, is losing luster, say prominent bankers and asset managers, who are reducing exposure to the area because of concerns about issues ranging from Brexit to France's "yellow vest" protests.

Instead, investors and bankers at the annual Milken Institute Global Conference in Beverly Hills this week pointed to increasing U.S. prosperity, and many said they are doubling down on investments in the United States. Panelists and audience members, in contrast, expressed significant worries about what is happening across the Atlantic.

Among the concerns: Great Britain will experience a hard Brexit separation from Europe, resulting in financial calamities; "yellow vest" protesters demanding equality in France will push the country toward unsustainable economic policies; Italy is not dealing with underlying issues that sent it to a third recession in a decade; big banks across Europe, including Deutsche Bank AG, have not dealt with money-losing exposures stemming from the 2008 financial crisis; and the European Central Bank has run out of options to fix all the troubles on its own.

"My main concern is Europe," David Hunt, chief executive of PGIM, the asset management arm of U.S. life insurance company Prudential Financial Inc, said at the conference.

Troy Gayeski, co-chief investment officer at SkyBridge Capital, which plowed money into Europe two years ago, agreed. "You are in a freeze mode in Europe because of Brexit, the yellow vests, the lameduck leadership situation, and Italy," he told Reuters in an interview. SkyBridge had roughly 15 percent of its assets invested in Europe in 2017 but has reduced that to around 3 percent now, he added.

The two investors' comments reflected what others, ranging from a Swiss bank executive to U.S. money managers, expressed in interviews and on panels over the past few days. Confidence in Europe's prospects was a rare commodity.

Gross domestic product across the 19 countries that use the euro rose 0.4 percent in the first three months of 2019 from the prior period, according to Eurostat, the European Union's statistics office. That was better than economists had expected, but anemic when compared with U.S. growth of 3.2 percent in the first quarter.

Many at the Milken conference, which brings together globally prominent business leaders and major investors,

said they have been moving money from investments in Europe to what they view as more stable assets in the United States.

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Lara Warner, Group Chief Risk Officer of Credit Suisse, speaks during the Milken Institute's 22nd annual Global Conference in Beverly Hills, California, U.S., April 29, 2019. REUTERS/Mike Blake

Even though the U.S. stock market is in the 10th year of a bull run and credit markets are thought to be tenuous, conference attendees still saw more opportunities in them.

Credit Suisse Group AG's chief risk officer, Lara Warner, said the Swiss bank is most worried about exposure to Europe. She highlighted growth in the United States, saying that the Trump administration's posture toward the economy gives investors a better feeling about prospects ahead.

"There really are no more monetary policy and fiscal options open to Europe," she said. "We are steering away from Europe."

The U.S. Federal Reserve's recent decision to hold off on further rate hikes has fueled stock and credit markets and put a lid on the cost of consumer credit.

A number of Trump administration officials, including his daughter Ivanka Trump, Treasury Secretary Steven Mnuchin and White House Chief of Staff Mick Mulvaney spoke at the Milken conference. They participated in events that invoked the theme of increased prosperity.

Panelists said Europe was suffering from reduced lending by banks on account of over-zealous regulation since the 2007-09 financial crisis.

Scott Minerd, global chief investment officer of Guggenheim Partners, said Deutsche Bank's failed attempt to combine with Commerzbank left unmet the region’s need for a dominant bank to emerge with the capability to support economic growth and compete globally.

"The discussion focused on the need for a German champion but what Europe needs is a European champion," he said.

Minerd, whose firm says it has more than $265 billion in assets under management, added that the European Union needed to make structural changes to prosper but was unlikely to do so in the immediate future.

"The only hope Europe has in the near term is to kick the can down the road and try to keep the experiment going," he said.

(Reporting by Svea Herbst-Bayliss and Matt Scuffham, writing by Lauren LaCapra; Editing by Steve Orlofsky)

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