Macron makes Europe more inviting

As political risk eases and economy grows, focus on investment

With political risk receding after the French presidential election, Wall Street pros say the time is right for investors to rediscover Europe as an investment destination.

The decisive victory of centrist Emmanuel Macron over anti-immigration, nationalist candidate Marine Le Pen shifts the focus away from fears of political tumult to Europe’s improving business conditions and investment opportunities, market strategists say. Macron’s win is a vote for European unity, raises hopes for economic reform and, perhaps more important, ends talk of France breaking away from the free-market European Union.

“The Macron victory takes a very big risk off the table,” says Scott Clemons, chief investment strategist at Brown Brothers Harriman. “I am more optimistic on Europe as a place to invest.”

The investment story in Europe, which has been held hostage by concerns about the political future of both France and the EU, has turned more upbeat postelection, even though Macron must still build a political coalition after parliamentary elections in June.

Still, investors are back to making investment decisions based on things such as earnings and growth.

And they like the numbers they are seeing.

The European economy, which grew at a faster pace than the U.S. in 2016, is expected to grow nearly 2% this year, Deutsche Bank says.

And that improvement, clearly visible with an indicator of Eurozone manufacturing health in April hitting its best level in six years, is leading to a revival in corporate profits.

Companies in the Stoxx Europe 600 stock index are expected to increase earnings 14% in the first quarter of 2017, the fastest growth since late 2015, earnings tracker Thomson Reuters says. Full-year profit growth is estimated at close to 20%.

Putting money to work in European stocks makes more sense given they are trading at less-expensive valuations than U.S. stocks, says Isabelle Mateos y Lago, chief multiasset strategist at money-management firm BlackRock.

Currently, European stocks are selling at 15 times earnings expected in the next four quarters, a 17% discount to large American stocks.

Investment dollars are expected to move back into Europe after Macron’s victory. Last year, European equity markets suffered $40 billion in outflows as investors tried to avoid political risk, Mateos y Lago says.

European stocks have a lot of potential to climb, as they have not enjoyed as big a rally as U.S. shares since the 2009 market low. The S&P 500, an index of largecompany U.S. stocks, has rallied almost 255% since March 2009, vs. a gain of just 150% for the Stoxx Euro 600.

Europe is also a little behind the U.S. when it comes to its economic recovery, which means “less positive news has priced into European markets, which gives them more room to run,” adds Chris Gaffney, president of EverBank World Markets.

S&P 500 FIRMS WITH SIZABLE SALES IN EUROPE