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Investors gear up for European growth as Frexit fears allayed

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French’s main equity index may have risen 7.4 per cent in the last fortnight, but global fund managers still haven’t had their fill of European equities, with many expecting another leg of growth after Emmanuel Macron’s victory in the French presidential elections

Eurozone equity market futures showed European bourses would open uniformly higher on Monday, with the French CAC40 index pegged to start with gains of 1.3 per cent after Mr Macron secured 65 per cent of the vote on Sunday.

Supporters of Emmanuel Macron kiss as celebrate outside the Louvre museum in Paris. Supporters of Emmanuel Macron kiss as celebrate outside the Louvre museum in Paris. Photo: THIBAULT CAMUS

The CAC40 rose strongly after the first round of elections two weeks ago when Mr Macron emerged from the first-round vote as the front-runner. His victory over nationalist candidate Marine Le Pen on Sunday crushed the odds of a French exit from the European Union – or a ‘Frexit’ – which would dealt a significant blow to European economic integration.

Mr Macron was always significantly ahead of Ms Le Pen in the polls, so his victory has already been priced in, said JPMorgan Asset Management global market strategist Kerry Craig. For the past six weeks, European equities have experienced positive inflows from international investors.

But Mr Craig believes the region offers further upside for investors. 

“The big risk that was sitting there has evaporated. You’ll see assets increasing off that,” he said. 

“It won’t happen immediately, as it was largely priced in. But it does paint a fairly rosy picture in the medium-term.”

Citi analysts Azzurra Guelfi and Borja Raminez Sewgura wrote in a note that the vote should see inflows into European banks, which could “benefit from lower political uncertainty in Europe”.

“We reiterate our positive stance on French banks as this result, in our view, removes most of the overhang on the positive fundamentals of the banks,” the wrote. 

Matt Sherwood, head of multi-asset investment strategy for Perpetual, agreed that the reduction in risk should allow Eurozone equities to trade closer to the values justified by their fundamentals in coming weeks and months. 

He said the Eurozone had been the “basket case” of advanced economies for the past six years. “But suddenly, it’s all come together.”

GDP figures released last week showed Eurozone GDP growth of 0.5 per cent in the first quarter, or 1.8 per cent annualised – a figure that far outpaces US annual GDP growth of 0.7 per cent. Eurozone purchasing managers indexes – which are leading indicators of economic activity – have been rising strongly higher all year. The IHS Market purchasing managers index for the bloc recorded its 46th month of expansion in a row in April

This economic optimism has fed through to equities, which in recent weeks have seen rising valuations (though Eurozone stocks were and still are trading at a significant discount to US equities). But this doesn’t mean there are no more gains to be had from investing in Europe, said Mr Sherwood. He pointed to corporate earnings upgrades in Europe gathering pace, justifying further share price expansions. 

“I think 2017 [in Europe] is going to be an earnings story rather than a valuation expansion story,” he said.

“I think the valuation expansion story has paid out. But we think Europe can grow faster than the US or Japan.

“And investors are still underweight Europe.”

Bill Street, the head of investments for Europe, the Middle East and Africa at State Street Global Advisers, was hopeful Mr Macron’s policies could fuel the next leg of European growth.

“Macron only offers upside surprises,” he said. “In a do-nothing scenario, we have the status quo of political paralysis, but with a favourable external environment and steady growth improvement. In the goldilocks scenario, Macron gets a working parliament and builds a partnership with Germany to launch meaningful reforms.

“That would deliver a substantial boost to markets by year-end, which is currently not priced in.”

Mr Macron however is somewhat hamstrung by the fact that his party, En Marche!, does not currently have any members in French parliament, having only been formed by Mr Macron a year ago. French parliamentary elections take place in June, and will offer an opportunity for the new president to boost his legislative power, said Mr Craig.

Were Mr Macron to embark on reforms like labour market flexibility, “we could see renewed market pricing for accelerated European Central Bank policy normalisation, especially if the data continues to impress,” Mr Street said. 

Mr Craig didn’t expect a sudden change in the ECB’s monetary policy position. “It might move towards tapering its bond buying program,” Mr Craig said.”But it’s not going anywhere on interest rates.”

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