Le Procope, a restaurant in Paris dating back to 1686, has, over the centuries, been a place where thoughts have been formed and ideas have been exchanged, thanks to the patronage of Rene Descartes, Jean-Jacques Rousseau and Jean-Paul Sartre.
Over the years, the mood in this restaurant has presumably gone up and down — depending on whether wars have been won, monarchies overthrown, or simply, the lives of ordinary citizens are fine. Unfortunately, at a recent lunch with numerous European CEOs and CSOs hosted by a global advisory firm, the outlook that was painted was as dim as Le Procope’s interior.
The 18-month-long war between Russia and Ukraine has dragged on longer than expected, and slightly further away, the bonfire in Israel and Gaza was re-lit recently, potentially sparking another European refugee crisis much like what Syria caused.
Within the Eurozone, there are growing worries that the already burdened larger economies like Germany will see their economic strength further sapped, fanning the popularity of far-Right parties like Alternative für Deutschland and similar ones in Italy and the Netherlands. Surging food and energy costs have further crimped spending power, where consumption has helped carry French and Spanish economies hereto (with the Germans traditionally savers anyway).
There was a silver lining, I was told: Poland. Yes, Poland — and no, it is not a bad racist joke but more of a sobering thought. Former Prime Minister Donald Tusk (not Trump) led his centre-left coalition to win the recent election by inspiring a record turnout, especially among the young.
As the former President of the European Council, Tusk is now seen as the force to help bring forward The European Project and carry the continent out of its present malaise or economic anaemia. Poland’s strategic positioning has been heightened recently. Poland stands between Russia and Germany if the Middle East dilutes the US and UK’s resolve to support Ukraine.
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Poor man’s burden
The image of poor Polish workers filling construction jobs in Britain so they can remit money back to their economy left far behind by the Western European powers is a dated one.
The Poles have stopped crossing the English Channel not because of Brexit and the UK’s self-exile from the continent. Rather, the “Polish plumbers” are staying put because their economy is enjoying record-low unemployment and strong nominal wage growth, further lifted by consumption demand from the nearly 1.3 million displaced Ukrainians.
Unusually, inflation decelerated from 18.3% in February to single digits when energy prices and supply disruptions from the war eased. At choice locations with access to the Baltic Sea near the German border, real estate prices and wages outstrip its all-powerful neighbour’s eastern (and still anaemic former Communist) end due to a younger population made up of working in vibrant and creative sectors such as tech, fintech and media.
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Poland is not alone within the EU. Ireland, on the other geographical end, is also not burdened by traditional industries and labour market rigidity. With a younger, growing entrepreneurial class, these economies have outperformed the traditional heavyweights of France and Germany while per capita is narrowing.
Rather than dismissing the entire Eurozone with a broad brush, there are pockets of opportunities if investors look carefully. Nonetheless, Europe’s health will be defined by the relative performance of its top two economies, for which there appears to be a dichotomy.
A tale of two countries
During my brief sojourn to Paris, I caught up with a British friend who lives in Germany. A serial entrepreneur, he had built, invested and sold several different companies and businesses all over Europe. We caught up in a Moroccan restaurant near the Pantheon for the tender off-the-bone lamb Tagines and perhaps because it was one of the safer places to be in, with Arabic spoken more than French.
As was typical, he was en route from Heidelberg (where he mostly lives) to Valencia, then Madrid to clean up some messes with his diaspora of minority-invested companies. He validated and corroborated what I picked up on this trip from European PE investors and professional services firms regarding Germany and France. More importantly, I gleaned some of the colour underlying the numbers we see in statistics.
The Germany of old I grew up with was Europe’s diligent, disciplined, and efficient industrial powerhouse, encapsulated by brands like Mercedes. Still, the continent’s largest economy, Germany, is managing a decline. The EU’s policy on electric vehicles (EVs) is a case in point.
Instead of capitalising on its head start and being a globally competitive leader, they are trying to be protectionist to hold the Chinese EV makers back because Europe’s EV industry is arguably five years behind in supply chain and skills.
The mismanagement of the Berlin Airport project — which opened around a decade late in 2020 — was described as “a story of failure and embarrassment”; scandals at Deutsche Post, and the just survival of Deutsche Bank, which still trades at a fraction of its book value, would have been unimaginable in the past.
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The older generations of Mittelstand companies (SMEs in Germany’s industrial heartland) with strong industrial technology and reliable processes that have been the backbone of the economy have struggled with a less industrious but “still stubborn” workforce that’s rigid, expensive, and insufficient.
Within the EU, they have largely tapped out Spanish skilled labour but have been unable to tap into their domestic population, which has constrained growth. Germany, which exercised strong and decisive political leadership at home and abroad under Angela Merkel, is no more. The French complain that Germany’s positions in the EU are inconsistent, making it an increasingly unreliable partner. Self-interest from economic to immigration and welfare cost burdens have stuck in a quagmire.
Germany, if it were a tad less nationalistic and protectionist of its industry’s flag-carrying names, would be a hotbed for M&A bankers. Except they are not the ones acquiring but the ones getting bought. The fact that there is richness in clean tech green energy technology where both Germany and France generally have been ahead of the curve globally makes the potential for acquiring mid-size companies or technology compelling for Asian companies. One hears of internationally competitive specialist engineering firms potentially finding their way to Singapore’s capital market, too.
On the other hand, France has much more economic dynamism and is not just because of the spillover from new construction ahead of the Paris Olympics next year. Foreigners with dealings in France will know how the French business and government elites are too clubby — given how most of them met at and graduated from the same ecole nationales; or how the state maintains its heavy traditional involvement, resulting in a lack of efficiency and responsiveness we are accustomed to in Asia.
Yet, thanks to President Emmanuel Macron, a former investment banker, there has been an underlying sea change. Less popular at home, especially with his attempts to extend the retirement age earlier in the year, Macron was criticised for his economic reforms and has not seen 500 unicorns listed in the Euronext Paris bourse yet. However, he has shaken up the economy, creating much more flexibility for start-ups, which is quite palpable.
Companies with less than 50 employees are no longer stuck under burdensome labour regulations and have a lot more flexibility to compete and attract talent, creating an economic vibrancy that is ground up. The rollout of fibre optic cables across the country and deliberate underinvestment in traditional telecoms infrastructure to force the population to “cut over” has enabled digital connectivity even in rural areas. This compares to underinvestment in Germany outside major cities.
I visited companies established by engineers and professors building laboratories experimenting with green energy and hydrogen projects. Around a now gentrified neighbourhood of Saint Ouen at the Parc Des Docks — the jewel in the crown of Singapore Exchange S68 (SGX) listed Cromwell European REIT (CEREIT), 30 minutes from L’arc de Triumph and Champs Elysée, and close to the Olympic Village, younger people use the industrial facilities for alternative offices. French Fintech thrives through experimentation whilst BaFin, the German regulator, protects their local banks.
It is no wonder, despite anaemic growth in Europe, its strategy of pivoting to the light industrial and logistics sectors in or close to major gateway cities in Europe is delivering growth despite a weak eurozone economy. With value creation, rental renewals within this asset, for example, have exhibited double-digit growth since listing.
As cities spread, the value of real estate potentially grows. In June, CEREIT sold its “trophy Milan asset” at a 14.6% premium above the original 2017 purchase price, above its book valuation. With the market price at just about half its book value and an almost 13% dividend yield, it appears to be another no-regrets gem, overlooked by a market clouded by perceived European negativity.
Full circle
It is somewhat ironic when CEREIT first attempted to list in 2017, against the advice of some stakeholders, it included Polish assets, which turned out to be a bridge too far then and had to be revised. It subsequently listed without these assets but acquired a different set of Polish office assets opportunistically after listing to build into a broad and diversified EUR2.3 billion ($3.3 billion) portfolio now in 10 counties. What CEREIT did is now seen as a sensible, proven strategy, a positive carry in the money, and a play of pockets of positive European growth.
In the same Parcs Des Docks site, I visited an exhibition of the new 200-km Grand Paris Express greenfield metro programme — a 15-year project that would be progressively completed by 2030, linking a circle around the increasingly vibrant and distinct suburbs of Paris.
Interestingly, there are Singaporean interests. Strides, a subsidiary of SMRT, is part of the consortium providing technical support and assistance. With French transport operation Transdev Group, they will be a “shadow operator” for four future driverless metro lines in Greater Paris. Likewise, ComfortDelGro C52 also won the contract to operate the South section of Paris Line 15 in July.
Proof of the pudding ultimately lies in welcoming foreign capital. Temasek opened its Paris office just this year, extending our country’s decades-old defence or Air Force partnership near Toulouse. When global investors have largely written off Europe, one must assume the choice of location must be significant and prescient.
It always pays to buy when no one is interested. And it is better to be on the ground to do some good homework. After all, there is always good wine and cheese to savour.
Chew Sutat retired from Singapore Exchange after 14 years as a member of its executive management team. During his watch, the exchange transformed from an Asian gateway into a global multi-asset exchange, and he was awarded FOW’s Lifetime Achievement award. He serves as chairman of the Community Chest Singapore
