The European elections are just ahead. Whether or not the U.K. is involved, it is a great time to review what is going on, and whether or not there is an investment opportunity.

Do European voters care?

Do European voters really care about these elections, and what goes on in Brussels? Some interesting facts and figures on voter participation came across my desk in recent days…

Historically, most Europeans haven’t cared about the European Parliament elections, but that might be changing.

In the last European Parliament elections in 2014, only 23.83% of Poles cast their vote. That’s quite amazing considering that Polish citizens have been some of the most dynamic in taking advantage of free movement across the EU.

Poland wasn’t the lowest turnout though. Only 13% of Slovaks bothered to vote. On the other end of the scale, 90% of Belgians and 86% in Luxembourg. The average turnout across the EU was 43.09%.

This apathy is on a well-established trend since these elections started in 1979, when turnout was 61.99% in 1979, it then fell at every subsequent 5 year election – until 2014. It was hardly a roaring endorsement of the EUs democratic credentials – turnout increased by a miserly 0.09%. But was it a turning point?

It was the first time ever that average turnout had increased. The eurozone generally, and Greece in particular, was in crisis at the time, and there were signs that long term voter apathy might have been turning to engagement.

This feels likely to be repeated across the continent as citizens are motivated to either support or oppose the nationalistic, populist wave surging from Belgrade to Britain.

It is a certainty that the balance in the European Parliament will change, with a more obvious, and loud, populist-cum-anti EU bloc. The stock markets across Europe are vulnerable if this new wave is bigger than expected, implying considerable disruption to reforms being put forward by Macron-ites.

But the European markets have been very subdued for many years even before this latest problem emerged.

European market down for two decades

The major European stock markets of the EU are still below their peaks of 1999/2000, that is two decades ago.

There are only two notable exceptions. One is our very own FTSE 100 index (up a bit), but the German stock market is the real star, up 73% (without income being re-invested).

Interestingly even the average European fund did better than the German Dax, let alone all of the other European stock markets – perhaps because there is such a rich choice of companies across Europe.

Even more impressively, European smaller companies funds generated more than twice as much growth as the other European funds, a notable success in such a volatile period when so many markets struggled.

To summarise:

European investment choices compared (1/1/00 – 6/5/19)

Dax 30 (Germany)  73%
Cac 40 (France)  -9%
Ibex 35 (Spain)  -20%
Average Europe (ex UK) fund  148%
Average Europe Smaller Co’s fund  382%

Back to Germany, and their stock market. Why their star status? What was the magic? Surely German voters will never turn their back on such a rip-roaring success.

All not as it seems

The strength of the German economy is legendary mythical. As economist Roger Bootle says:

“Since the formation of the euro in 1999, Germany’s economy has grown by about 32% while the poor old UK [not a hint of sarcasm!] has grown by 43%.”

Over the same period US and Canada grew by 49% and 53% respectively.

What is going on? Over this period German consumer spending rose by only 20% which, by no coincidence, is close to the average increase in German wages, 23% after allowing for inflation – even worse than the anaemic growth by the German economy as a whole. Predictably the winners were German companies, who have done “spectacularly well” says Roger, largely thanks to strong exports.

This is very similar to the trend in many countries – with growing inequality, a sense by the many of being overlooked, and increasingly polarised and populist election outcomes.

But even Germany’s dominant export sector is now under pressure. New EU car emissions haven’t helped. Nor has the falling away in car sales globally – why bother with an internal combustion engine, just wait a couple of years to buy an e-car. Plus China has slowed, Germany’s biggest trading partner. In addition, with the UK being the Germans second biggest car export market, the Brexit practicalities (as yet unknown) could have a much bigger impact on Germany than the mere uncertainty which now prevails.

“Germany is going into recession without a doubt” said leading German economist Heiner Flassbeck. A similar slowdown, if not (yet?) recession, is evident across Europe.

“Factories across Germany, France and Italy are suffering an industrial recession” says the Daily Telegraph, though perhaps with a little too much enthusiasm.

The lack of confidence which drives consumers to spend less, companies to invest less, and employers to employ fewer people and pay lower wages, is the same lack of confidence which drives more extreme political outcomes – the result for the right wing Vox party in Spain just the latest example of a trend which has been in place for years, and which will persist for many more.

For the developed economies globally (not just in Europe) the causes of this lack of confidence remain the same as we have highlighted for a number of years. There is too much debt, (sucking oxygen out of the economy) and ageing populations (spending less), plus new technology enabling more to be done by fewer people on lower salaries.

So, is there an investment opportunity?

Clearly there is a great breadth and depth of opportunity across Europe, which is why individual fund managers perform rather well compared to the indices.

Moreover, European smaller company funds are a bit of a star sector.

Yet it is difficult to feel comfortable initiating an investment into Europe with so many risks swirling.

I am consoled that more often than not the investments which have generated the best returns were uncomfortable at the time they were made.

Therefore, as we are now building a shopping list, particularly for the gradual re-investment of large cash holdings, European smaller companies will go on that list, Aberdeen European Smaller Companies being the current fund pick.

More on that “shopping list” in coming months.