Europe is in a bad place when it comes to political uncertainty.
From Brexit to the Italian senate referendum later this year, policy uncertainty is dominating in almost every major economy on the continent.
In Britain, no one really knows whether we’re heading for a hard or a soft Brexit — or even really what those things mean.
In France and Germany, general elections loom in the coming year, with populist parties set to gain and the status quo likely to be disrupted. And in Italy, the upcoming constitutional referendum has the potential to make or break Prime Minister Matteo Renzi’s government.
All of this uncertainty is not only worrying for the average man on the street, but it’s also causing investors to pull money out of the continent for longer and more quickly than during the financial crisis, according to strategists from HSBC.
In an “Equity Insights” note circulated to clients this week, HSBC’s Amit Shrivastava, Robert Parkes, and Eshan Raka note that investors have been taking cash out of European equity funds for 31 consecutive weeks, an unmatched streak in the fund market.
This is down to two key political flashpoints — Britain’s move to leave the European Union, and Italy’s constitutional referendum.
Here’s the crucial paragraph from HSBC’s research:
“Heightened uncertainty in Europe is driving funds out from the region. Whilst the Brexit induced uncertainty still looms over the region, the announcement of the date for the Italian constitutional referendum (4 December) has the potential to further aggravate the situation. There has been a net outflow of funds from Europe for 31 consecutive weeks. This is the longest streak of outflow ever recorded. Also, at USD77bn, the size of the outflow is also the highest on record.”
Shrivastava et al continue, saying (emphasis ours):
Sustained fund redemptions from Europe highlight the concern over the high level of uncertainty associated with the region. With Brexit induced uncertainty still not abating, Italian constitutional referendum is next in line with a potential to shock the equity market and trigger renewed volatility.
And here’s the bank’s chart showing the sheer scale of the money being pulled out of Europe — note that outflows are steeper than during the financial crisis:
Fund outflows reflect the broader sentiment within Europe. No one has much clue what the political landscape across the continent is going to look like in the next couple of years. Who will be in power? How much support will populist parties get? What will Brexit look like?
All of these questions weigh heavily on the economy. This is reflected by IHS Markit’s latest PMI data released on Wednesday morning, which showed that businesses are deferring investment because of uncertainty.
“The slowing rate of growth across the region in part reflects growing caution among businesses in terms of their spending due to worries about the economic outlook, linked in many cases to political uncertainty. We see this trend persisting into next year, as the impact of Brexit is exacerbated by uncertainty surrounding elections in France and Germany alongside ongoing political unrest in Italy and Spain,” Markit’s Chris Williamson said in a statement alongside the numbers (emphasis ours).