London/Frankfurt/Zurich, 11 April 2019 – As the euro celebrates its 20th anniversary, investors worry about how it will fare in the next recession. Brexit, international trade disputes and protectionism add to the uncertainty.
In a new report published today, UBS Global Wealth Management provides an in-depth analysis of how the Eurozone's economy, capital markets and currency could withstand a serious economic downturn.
In particular, the report examines three stress-test scenarios, ranging from an expansion to moderate and severe recessions, to identify the key risks for bond markets, major currencies including the euro, and European banks.
Christine Novakovic, Head of Wealth Management EMEA at UBS, said: "Clients in Europe and beyond tell us they worry about the risks of a future recession. And whilst we believe that with the right financial planning investors can weather almost any storm, we take these concerns very seriously and need to address them. Therefore thinking long-term about Europe will help clients make informed decisions and manage their exposure."
Mark Haefele, Chief Investment Officer at UBS Global Wealth Management, said: "There is a cloud of uncertainty hanging over the monetary union. Its future will depend on a new generation of leaders, including the ECB's next president, and we believe investors are well-advised to take recession risks into consideration when preparing their portfolios."
Themis Themistocleous, Head of the EMEA Investment Office, said: "In order to build long term support for the euro, we believe it is crucial that governments pursue their plans to complete the banking and capital markets union with a sense of urgency, while building up fiscal space."
Ricardo Garcia, Editor-in-Chief and Chief Economist for the Eurozone, said: "A recession could clearly put the Eurozone's cohesiveness at risk. While we believe that the euro should survive even a severe recession scenario, investors should expect austerity and populism to be a serious threat to it, potentially leading to flows into other currencies such as the British pound or the Swiss franc."
Populist uprising has led to recessions in the past. According to the report's findings, concentrated country risk can be found in Eurozone members such as Italy, where market pressure and credit downgrades could force deeply unpopular fiscal adjustments, and Greece, which would likely require further funding support. Investors are advised to prepare accordingly as both the Greek (2015) and Italian (2018) standoffs led to economic downturns, the report cautions.
More generally, a recession would likely lead to significant structural changes for the Eurozone, affecting even its strongest members. Deeply negative Bund yields could create difficulties for the German banking sector, push retail deposit rates into negative territory, and boost the appeal of populist parties such as the Alternative for Germany (AfD), making future government formation even more difficult for Europe's leading economy.
With EU elections only weeks away and four of the EU's five presidents to first take office by the end of the year, including Mario Draghi's successor at the helm of the ECB, additional risk factors and uncertainties need to be taken into account when investing in Europe.
For the ECB specifically, the report's severe recession scenario anticipates a new generation of monetary policy. Levers such as equity purchases or potentially more dramatic measures (helicopter money or sharply negative interest rates) urge investors not take the zero lower bound for granted.
UBS Group AG