Why Europe will Shine in a Robot Future
Investment Climate and Opportunities in Good Old (New) Europe
This analysis was presented and discussed in a different format by VI2 Partners at the
NUS (National University of Singapore) Medicine International Council Berlin Conference: New Europe and Germany on April 23, 2018
Many political and financial analysts believe, that Europe is doomed to fall behind in the competition with the new economic and technological powerhouse China and the massive talent hoover and technology breeding ground US. We want to argue in a different direction and explain why we believe more in a next level European Renaissance than in Europe turning into a Museum for the World. The reasoning will start on a global level, move on to European developments and give an outlook, on which industries we are particularly bullish for the future.
The Global Arena – War is in the Air
The World is moving fast into diverse armed conflicts, without any power showing significant interest or activity to stop or contain these developments. The political post WWII order is trembling and shuttering and will ultimately make room for a new world order following a big earthquake. War is in the Air everywhere and in multiple dimensions:
- Twitterman versus Rocketman Saga: Do not trust the fog bombs that both parties are throwing around. While Trump has changed the quality of the North Korean leader from insane to honorable in a minute, and Kim Jong Un is reflecting on de-nuclearization, both players are lying big time. Hangover more probable, than honeymoon (Macron might also be jealous, in case that Trump would start to kiss Kim during their encounter). In any case: good marketing show for both actors.
- Isolation and Radicalization of Russia: Russia has overplayed his hand and gets punished for this on all levels. Pushed into the corner of the ill-mannered child, more chaos and disruptions in Europe and the Middle East will be targeted. Alienation between NATO and Turkey, sowing disaccord in the EU, conflict between Israel and Iran, and escalation in Syria. The resulting side effect of higher oil prices will over compensate for the sanctions of the West.
- Iran, Israel and the JCPOA: It is only a question of time, when the Syrian mess will also lead to a bigger clash between Israel and Iran. Israel in this case can be expected to also inflict material damage to the ballistic and nuclear program of Iran. On the JCPOA, we believe that Netanjahu, Pompeo, Bolton and the conservative establishment will win over the European attempt to save the Iran nuclear deal. If not in May, the plan might soon be history.
- Trade War: As we have discussed in earlier contributions, China will be punished by the US. It is in the long-term economic, political and military interest of the US, to weaken or at least decelerate the economic rise of China. Trade war is coming.
- Cyber War: is already taking place. All capable countries are increasing their defensive and attack capabilities. More battles to be seen soon.
- Authoritarian Tendencies: In times of fundamental global and societal changes, people are voting for authoritarian leaders. This can be observed around the globe. With the free press being in recline, political parties as power buffers dissolving, war memories of the population fading and the nation state back in fashion, water temperature is rising in the risk pot of leaders going wild or rogue.
Europe – Renaissance or Museum?
To Europe. Given the global percussions, Europe feels like a safe haven of stability, which will be rewarded. There are signs, that Europe can stay a main player in the future and enjoy a bright economic future:
- Broad based recovery: finally, after nearly 10 years of disappointing growth, all major EU economies have started last year a broad-based recovery. We will experience over the next 24 months stronger wage growth, decreasing unemployment, reduction of budget deficits, and rise in inflation in all major EU economies.
- Diversity and Innovation are elements that mutually support each other. Mixed with a tradition and culture of sciences and invention, Europe has the best natural breeding biotope for game changing technologies and research. And the countries in Eastern Europe from Poland to Romania and Ukraine are only starting to join the game by returning to their roots of scientific excellence in engineering, mathematics, information technology, aviation and others. A young generation of scientists and entrepreneurs take over and will lead Europe to a new level of innovation. Check out where the game changing innovations in most natural sciences and technology areas originated over the last 50 years. No wonder the Chinese are out hunting.
- Re-industrialization: The peak globalization is behind us and the big move of production to Asia is over. Many companies in Europe are considering to re-locate at least parts of the production back to Central Europe. Automatization and robotisation favor excellent skills, rule of law, IP protection. Labor cost becomes close to irrelevant. Increased protectionism, changing tax regimes, and the political will to re-industrialize are increasing this trend.
- New social models: Europe will be the first region to test new social models of general income and/or general pension. As certain professions will soon become obsolete on a large scale and faster than many can imagine, new social models and contracts will be a necessity, and Europe will profit from its lead.
- Quality of Life: Europe is the place to be. In a world of robots, VR and constant information and communication, people will long for a place of serenity, nature and pleasure. To offer quality of life will be key to attracting talent in the global arena in the future. Top talent will choose to live in the best places. From the top 10 cities in the world in the latest Mercer Report on Quality of life, eight cities are located in Europe.
Certainly, there are risks around. Brexit, Catalonia secession and traditional Italian political chaos will keep the European capitals and Brussels busy. But in our view the economic impact of Brexit will only be short lived (on the EU side of the Channel), and in the mid-term already prove beneficial to the continent. The constant aging of the population is cause for concern and will require a massive overhaul of social security systems and massive attraction of qualified foreign immigrants against the general mood in the population. Alone in Germany 500.000 qualified immigrants will be needed per year, to keep the pension age at its current level. Europe is falling back in patent applications and industrial production in comparison to Asia, but do not mix up quantity and quality of patents and innovations.
Key Investment Areas – Go and No-Go Zones
Looking to the key investment sectors in Europe for future investments and why we have chosen those:
- Fashion, Design and Luxury FMCG: The world wants to consume European and mirror European taste. Wherever you travel in the World these days, luxury brands are dominated by European players. The new affluent population and middle classes of the world want to drive Mercedes, wear Prada and Gucci and drink Bordeaux wines. Rising global wealth in China, Russia, the Middle East and other regions will lead to higher demand.
- Defense: Higher independence from the US, the growing insight that European governments allowed the run-down of their military, the accepted NATO doctrine of 2%-defense spending relative to the GDP, and new global threats, lead to significant modernization and increase of defense spending of all major European countries. Gone are the times, when it was en vogue to decrease the national defense budgets.
- IT/Cyber: Corporates, Governments and Privates are waking up to the cyber threat in all areas. Huge need to catch up with reality leads to an investment wave into devices, services and processes. No trust into US, Israeli or Russian solutions. Big chance for European players.
- Clean/Blue/Green Tech: It is the continent of environment freaks, where train tracks and motorways are not built because of rare species, the population turns maniac about nuclear, GMO, pesticides and any type of emission. Innovation in this area will be developed and tested here.
- MedTech: The fusing of medical technology, IT, robotics and nano engines and machines will prove to be a key sector of European development, bringing together historical key strengths and skills of the continent.
- Agriculture and Bio-Food: The westernization of eating patterns, increase in wealth and concentration of population in the cities lead to increased demand of animal farming as well as traditional crops, while at the same time fertile agricultural land is shrinking globally. Central Europe from France to Germany via Poland, Russia, Romania and Ukraine has by far the largest black soil agricultural surfaces in the world, and the potential in some Eastern European countries in terms of professional agro management, output efficiency and logistics is by far not fully utilized. We believe in strong price growth both in agro products and land in the near future, especially in the high-end segments of non-GMO food and low pesticide and bioorganic production processes.
NO-GO: Banking (weak capital base and legacy systems in a fintech world) and car Industry (emission scandals, new ownership models, electric vehicles).
COUNTRIES: We would overweigh France, Netherlands, Germany, Austria, Poland and Romania. The risk-takers should have a look into Albania, Serbia and Ukraine.