The investment community is coming to grips with the effects from the horrific attacks in Paris. These abhorrent actions should not be callously dismissed and retribution is being dealt with as we speak. But what of the financial and market effects? The initial reaction, at least as portrayed by the regional stock markets, seems muted.

The CAC 40 (France’s major exchange), ended only fractionally down on Monday (losing less than 0.1 per cent) and is now up about 2 per cent since the attacks. So what will the effects be over the medium-term?

Historically speaking, terrorist attacks have had little lasting effects on markets in Europe. Markets spent very little time in the red after the Madrid bombings and the London Tube terrorist attack. They rebounded and traded higher shortly afterward. The fall-out, in this case, may structurally affect certain aspects of Europe’s fragile recovery and could forestall a meaningful rebound.

1 Weak hospitality: the low euro was a boon to tourism and tourism planning for the European region. American tourists are looking at a significant discount to the prices paid just a year ago. Now, however, the cost of security needs to be considered. It is almost a certainty that the murderous acts in Paris mean tourism will be diminished in the Eurozone. Unfortunately, these concerns and fears are likely to persist for some time. All aspects of services, employment and fiscal revenues associated with the hospitality industry in Europe are likely to suffer. Even though tourism represents only about 3.3 per cent of the European economy and 7 per cent of the economy in France, a material pullback in tourist arrivals will in many shapes and forms frustrate general economic growth in Europe. France, which is essentially a temporary police state, risks going into recession if consumer and business confidence erodes. With daily threats to major US cities we would expect that there will also be a secondary impact on US hotels and restaurants in major metropolitan areas, especially if the terrorists’ activity persists. Shares in the cruise industry have been weak since the new threats will likely increase the cost of security, insurance and also impact bookings.

2 Lower euro and lower rates: with lower European growth expectations and the increasingly likelihood of deflation, the European Central Bank is likely to remain highly accommodative and has indicated to get even more aggressive on monetary easing in Europe. The result is likely lower rates for longer, a weaker euro and the possibility of negative rates further along European countries’ yield curves. Risk assets, ironically, may see a bid given microscopic discount rates and their relative attractiveness versus competing financial assets.

3 Sovereign fiscal deterioration: France has already indicated it won’t meet its fiscal consolidation time-line or goals given its need to enhance spending on security and the military. Thus, its leverage and debt situation is unlikely to improve. Lower growth and possible heightened military/surveillance spending by other European governments will also mitigate any deleveraging. Look for sovereign debt balances to escalate possibly putting pressure on the peripheral yields (Greece, Portugal, and Italy) as the ability to repay borrowings becomes increasingly more difficult with anaemic economies.

These are only a few cursory assessments of the situation and outlook over the medium term. They are not meant to deflect or minimise the condemnable actions in Paris and the magnitude of their disgusting nature. The European region continues to benefit from the combination of a weaker euro, lower oil prices, easing in lending standards, and plenty of pent-up demand. We also would expect Paris and France to rally and prosper over time as we believe in the resilience embedded in human nature.

Nathan Kowalski CPA, CA, CFA, CIM is the chief financial officer of Anchor Investment Management Ltd and can be reached at nkowalski@anchor.bm

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