Trading Insights: A structural shift in European geopolitics

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Lauren Anderson: … six months ago, it seemed everyone was pretty down on Europe… I think that has changed somewhat as we've seen the political will in Europe change. And of course, it's coalesced around this defense issue. But really, even more than that, the narrative around competitiveness, burden reduction, unleashing investment, there really does feel like there's a sea change happening and there's much greater political will to try and unleash the EU's potential.

Eloise Goulder: Hi, I'm Eloise Goulder, head of the Data Assets and Alpha Group here at J.P. Morgan. And today I'm so pleased to be joined by Lauren Anderson, who is head of the Europe, Middle East and Africa Government Relations here at J.P. Morgan to talk all things politics and geopolitics across the EMEA landscape. So Lauren, thank you so much for joining us here today.

Lauren Anderson: Thank you so much for having me.

Eloise Goulder: And what a time to be discussing all these things, because there is certainly a lot going on.

Lauren Anderson: Absolutely. No shortage of issues.

Eloise Goulder: So Lauren, could you start by introducing yourself, your background and what your remit really is?

Lauren Anderson: Sure. As mentioned, I'm the head of Government Relations for Europe, Middle East and Africa here at J.P. Morgan. I spent most of my career in the public sector, both in the U.S. and here in the UK. I was at the Bank of England for many years. I was the head of Brexit after the referendum. But most of my public sector career was really in crisis management, financial stability. After leaving the Bank of England, I was at the Bank Policy Institute, which is the largest U.S. bank trade association out of Washington, D.C. And then more recently, about two years ago, I joined J.P. Morgan. And in terms of what we do in government relations, my job is really to support all lines of business and advise them on developments in financial services policy, as well as geopolitical risk more broadly. We provide frontline advocacy with governments and legislators across the EMEA region. So it's a very interesting time to be supporting the business.

Eloise Goulder: Well, you've definitely got the breadth of experience across both sides of the Atlantic which is brilliant for today's discussion. So could we start by level setting on the current geopolitical backdrop? Last year was obviously a very significant year for global elections, with over half the global population going to the polls. So Lauren, how would you summarize the outcomes and what they mean for geopolitics today?

Lauren Anderson: Sure. So I think, number one, the vast majority of western elections last year were elections of change. That was probably the biggest theme that we saw, whether it was a move from the left to the right or the right to the left. They were all change elections on incumbent governments. The second big theme that we saw was the shift to the right. A lot of that driven by cost of living, immigration, backlash against the green transition, and security concerns more broadly. So we definitely saw that in Europe, both at the European Parliament level, also in the context of many member states. But we saw it in other parts of the world as well. I mean, certainly the U.S. election being the other largest election where we had a move to the right. One of the other big themes that we certainly witnessed, particularly in western elections, was the continued rise of populist parties. We've most recently, of course, seen that in the German elections, where the AFD came in second with 20% of the vote. We saw it in the UK with the Reform Party coming in with just shy of 15% of the vote. And they're currently actually polling very close to Labour at this point. We continue to see populism in France. We'll have to see how that sort of plays out. And it's on both sides of the spectrum. I would say it's on the left as well as the right. And that is something that has not gone away yet.

Eloise Goulder: Yeah. I mean, in the German elections, the Linke Party also surprisingly exceeded expectations, didn't they? Just showing that populism is not just on the right right now.

Lauren Anderson: Absolutely. It's both sides of the spectrum. And I think it's going to a lot of those very base concerns that electorates have, whether that is cost of living, whether it's immigration, whether it's the concern about their own livelihood and security. Those issues play to both sides of the political spectrum.

Eloise Goulder: And if we just dive into Europe now, European stock markets they've had a very strong start to the year. While the U.S. S&P 500 is down on the year as we speak, the Eurostox is up more than 10% year to date. And really, if we look at which companies have led within Europe, there are two major themes. There's European financials, which are the best performing sector within the stock 600. And arguably, they've benefited from an improvement in growth expectations and sentiment from quite a low base in Europe. And also the dovish ECB and the steepening of the yield curve, which in theory is good for their profitability. So that's one group that's really led European equities this year. The other group more recently that's rallied is anything to do with a Ukraine ceasefire narrative. So we have a Ukraine ceasefire basket of 40 names, which has rallied over 20% this year. And it's exposed to construction, industrials, Eastern European exposed banks. And of course, defense companies in Europe have rallied over 70% year to date. So those are the segments that through a markets lens, we see significant outperformance this year. Lauren, from your lens and given your expertise in the geopolitical side of things, what are your thoughts on all of these themes and the extent to which they will be durable through the course of 2025?

Lauren Anderson: Well, certainly on the financial side, as you rightly said, there has been a better performance over the past year. I think a lot of that came in with the change in narrative that we heard in Europe off the back of elections, to a greater focus on competitiveness, growth, investment, the capital markets union is being revived in the context of the savings and investment union. There's a push at the commission for simplification, reducing regulatory burden. All of those things should be net positive in terms of European financial landscape. And certainly if progress can be made on the savings and investment union, that will certainly help financials within Europe. So all pretty much net positive there at the moment. The other big theme that you mentioned, defense is clearly here to stay for the foreseeable future. EU leaders are discussing the von der Leyen's rearmament plan, which could unlock up to 800 billion euro in additional funding for the sector. So they're looking at a wide range of different fiscal options. So for example, exempting defence from fiscal rules, joint debt is back on the table, flexing EU funds for greater use in the defence space. And given the challenges, particularly on the geopolitical front, not just what happens in Ukraine in terms of a possible ceasefire, but more broadly in terms of the discussions around NATO, security guarantees, and European member states have really woken up to the fact that they are going to have to spend much more on defense as a measure of GDP. So the NATO Secretary General has recently said that members will have to spend considerably more than 3% of GDP on defence. The U.S. has previously called for upwards of 5% of GDP. Even if you're at three or five, it's more than it is today. And certainly that will be beneficial for defence stocks going forward.

Eloise Goulder: That's reassuring to hear that some of these themes are quite structural in nature, the changes in the financial space, and obviously the changes in the commitments from governments to spend on defence. And we're obviously just recently passed German elections and there's this renewed commitment from the German government to both spend more fiscally and specifically on defence. What are your views on that?

Lauren Anderson: Yeah, so the German election is another election where we've seen the outcome move towards a more centre-right coalition. Merz has been very clear in his statements to date that Germany needs to spend more on defence, really has to be more independent from the United States in this space. There does appear to be complete political commitment to spend more in Germany, which is a huge boost to Europe more generally, and also I think has revived some of the positivity around the German narrative.

Eloise Goulder: Well, it really feels like a turning of the tables versus the U.S. You know, if we rewind a few years, the U.S. was fiscally spending much more and it feels like Europe now has a turn at that. Are there any concerns from your side about European countries spending more and increasing their debt levels? I understand that German debt starting point is lower, but the direction of travel, how do you feel about that?

Lauren Anderson: This is a key question, obviously, because you have a lot of European countries that are highly indebted. I mean, you look at France, this has been one of the major points of political instability that they've had to navigate over the past year, given the deficit is currently above 6% of GDP. They're trying to get it incrementally down. I think it's trying to aim at 5.5 over the next year. That is still well above where the EU considers a sustainable debt level. And that's why I think a lot of the discussion is happening at the EU level. And we hear talk of repurposing existing EU funds, joint debt, and that's largely because there are many countries within the EU that are fiscally constrained. So they're going to have to look for other areas to support this funding need. Interestingly, we heard France come out and say it's going to require more taxes on the wealthy in order to support defence spending. So we could see more of that type of rhetoric as well. There's also a really big push for public-private partnership in this space. And that's where things like widening the mandate of the EIB to be, more able to fund defence projects, but partnering with the private sector, we'll definitely start to see more of that.

Eloise Goulder: And where does the UK fit into all of this? I mean I would assume that in some ways it's quite aligned with everything you've just said. Obviously, the UK government is also committed to further defence spend. On the other hand it's not part of the European Union.

Lauren Anderson: Yeah, so the UK has some of its own positives as well as its own challenges. Certainly on the positive side the UK has London, one of the most vibrant capital markets in the world that provides a huge amount of growth potential for the UK. But the UK is also still battling off the back of leaving the European Union in terms of how do they rebuild elements of that relationship? Where can the economic ties be broadened and deepened? Defense will obviously be one of those. also, I think, around cyber and intelligence where the UK has a definite advantage. Those are all net positives. However, the UK does remain in a tight fiscal position. It has demographic challenges similar to the EU, labor challenges similar to the EU when it comes to immigration, and how the government is able to translate its growth and investment narrative into actual positive GDP numbers is yet to be seen. Some of the positives, though, certainly on the defense side, we recently saw a widening of the National Wealth Fund mandate. That is giving the government more optionality, more space. So I think as long as they continue to be creative and look at all options on the table, they have a good chance of navigating to success.

Eloise Goulder: So we've spoken about several, arguably structural, positives for European markets whether it's a boost to the financials within Europe, or it's greater fiscal spend, which yes, that comes at a cost, it comes at a cost of higher debt, but it's typically a good thing for equity markets, or of course, ceasefire potential in Ukraine. So Lauren, how do you think about the overall picture? Do you see it as incrementally positive for Europe as a result of these factors? Or are there longer term structural challenges that still really worry you?

Lauren Anderson: Well, I think six months ago, it seemed everyone was pretty down on Europe. Certainly when I was at the IMF World Bank annual meetings in October, it was very negative on Europe. And even at Davos this year, there was a lot of negative commentary. Maybe we'll see it first in defense, but then hopefully that can carry through into other areas, such as financial services, where we mentioned the savings and investment union, where we're hoping to see progress this year, on securitization reform, maybe some market infrastructure reform, all of which would be beneficial to the European economy. The Commission is also looking at what can they do, particularly in the digital and technology space. And that I think is one of the next focal points of how can the EU really invest and unleash the digital potential that exists within the bloc. And if they can get those three things right, they're on a pretty good path for success.

Eloise Goulder: It sounds to me like we're still waiting to see the fruits of all of these positives in terms of GDP growth, which has been so muted in Europe for so many years, particularly relative to the U.S. But there are many things to be optimistic about. I guess one challenge that we haven't really touched on yet is tariffs and the extent to which this could hurt global trade as a whole and perhaps Europe in particular. Lauren, how do you think about these developments?

Lauren Anderson: Certainly tariffs are going to be a big theme of 2025. And I think at the moment, probably the markets and policymakers alike are having a little bit of whiplash when it comes to the new administration's approach to trade and tariffs. The most broad reaching tariff proposal that we have heard thus far is around reciprocal tariffs. Now, how that would actually work on a line by line basis is not entirely clear. But certainly, that's the one that could have the broadest implications globally. At the moment, the tariff discussion has obviously been targeted on a few countries and particular sectors, Canada and Mexico being most in the crosshairs. But of course, we had the announcement of tariffs going into effect. And then within 24 hours, we had a reprieve, at least on the auto tariffs. So we'll have to see really what happens. And certainly key in all of this is what are the retaliatory measures. We had Canada come right out of the gate and announce retaliatory measures on a number of goods with a phase in for further retaliation over a 21 day period. Mexico also delaying an announcement on retaliation. Interestingly, in the context of China, which were started at a 10% tariff now an additional 10% tariffs, the Chinese came out and announced some retaliatory measures, but not really in an escalation format, rather, they were pretty measured, looking at 10 to 15% on U.S. agriculture, adding a number of U.S. companies to the unreliable entity list, all of which was probably likely expected. I think the big open question is really what happens in the context of Europe, we haven't had any full detailed announcements yet there, we know the administration is looking into VAT as a non-tariff barrier, that would obviously have huge implications for certainly the European Union, but countries like the UK as well. So there's a lot of road to travel on this. But I think it's very hard to imagine that the European Union escapes some form of tariffs from the U.S. administration, and we'll have to wait and see what the retaliatory measures look like. But Eloise, we've talked a lot about the political themes… How do you see that translating into the markets in Europe?

Eloise Goulder: Yeah, it's a really good question because there's been this strong rally year-to-date. Eurostoxx 50, as I said, up more than 10% year-to-date, clearly outperforming U.S. markets, which are down on the year. And so I think the big question facing investors today is, was this rally just a cyclical catch-up trade or is it reflecting something more structural, which is changing under the surface in Europe? And to that end, it's been really helpful to hear your views on some of those structural dynamics that are potentially here to stay, whether it's greater fiscal spend from European governments, greater spend on defense or better coordination between the countries here in Europe. My view, particularly having heard you, Lauren, is that there are some themes that are likely to be here to stay, that are likely to be supportive for European equities. And our conviction will go up if we actually see that translate into better growth. We've already seen this inflection higher in certain softer data, survey data, for example, the German IFO, the ZOO. Some of the economic sentiment data sets in Europe have improved recently, but really we'd like to see some hard data improve, whether that's GDP growth or earnings growth in Europe, which is yet to be seen. So I think there are big caveats, big question marks, but as always, European equities move ahead of the hard news. And that helps explain why we've seen this rally year to date. If we look outside of Europe to the other areas within your remit, so Middle East and Africa, are there any major themes, developments or perhaps bright spots that you would highlight?

Lauren Anderson: Yeah so I was just in Dubai the other week, and I have to say the optimism in the GCC is incredible. People are very optimistic on the growth potentials. They've had a lot of money inflow off the back of COVID, certainly off the back of the Russia-Ukraine conflict. But they're also looking ahead to the future. I think the governments there realize that they have to diversify away from being fossil fuel-based economies. They're looking at becoming more knowledge-based economies. There's a huge amount of investment in technology, AI, smart cities, all of these new initiatives for the future. And I think that means there's a lot to be positive on. They're also in a very interesting place geopolitically. As I heard it many times when I was there in the region, they're sort of looking to be a Switzerland of the Middle East. And so in some senses, that's where they're partnering with the U.S. on many of the advanced technology pieces, financial services, intelligence led growth opportunities. And with China, they're partnering on much of the infrastructure development, goods and services, and that corridor continues to grow from an import export perspective. So a lot to be really positive about in that region. Obviously, we'll see what happens geopolitically. But there's hopefully a good chance of having some sort of normalization of relations at some point with between Saudi and Israel, which would be certainly net beneficial.

Eloise Goulder: And obviously, we see the GCC as a real growth area in our industry as well, when you think about growth in private banking and asset management in that region.

Lauren Anderson: Absolutely.

Eloise Goulder: Well, we've discussed so much about what's going on today. Before we go, Lauren, can we just think about the longer term, the next year or two?

Lauren Anderson: Yeah, I think looking forward, there's a few thematics that we would expect to continue. Advanced technology and where that goes over the next three to five years is going to be very dynamic. And that's something that I expect all developed countries and even those on the periphery will be really focused on trying to achieve gains in that space. More broadly, I think we're going to see a realignment of the liberal world order to some extent. There will be new country alliances that are formed off the back of this U.S. administration. Some of the trade dynamics will shift those country alliances. And we'll have to see what that really looks like going forward in terms of where the major power blocks globally and what happens with China, what happens with the BRICS, and then of course, Western developed economies that are facing many structural problems such as demographics, aging populations, social spend, etc. So a lot could happen in the next three to five years.

Eloise Goulder: It's absolutely fascinating. Well, thank you, Lauren, for taking the time to sit down with us in what must be such an incredibly busy time for you. It's really helpful to hear your views, particularly on Europe, given that we've seen quite a strong rally from European equities this year. And certainly we've seen Europe outperform at the expense of the U.S., which is something that we haven't seen sustainably over the last 15 years. So a very helpful time to understand the geopolitical and the political dynamics going on here in Europe and the extent to which they can be durable... So thank you very much for going through all of this with us today.

Lauren Anderson: Thank you very much for having me. It's been a pleasure.

Eloise Goulder: Thank you also to our listeners for tuning into this bi-weekly podcast series from our group. If you'd like to learn more about Lauren's work, then please do reach out to your J.P. Morgan sales representative. Otherwise, if you have feedback or if you'd like to get in touch, then please do go to our website at jpmorgan.com/market-data-intelligence, where you can always reach out via the contact us form. And with that, we'll close. Thank you.

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