Macron makes Europe 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 freemarket 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 post-election, 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.
U.S. investors looking to profit from Europe’s recovery can gain exposure to stocks headquartered in the Eurozone in three ways:
S. investors can invest in European stocks via low-cost exchange traded funds. Examples include Vanguard FTSE Europe ETF, SPDR Euro Stoxx 50, which invests in 50 of the Eurozone’s largest companies, and iShares Europe ETF. Investors who want to bet solely on France’s market or Germany’s equity market can invest in country-specific funds.
investors who want to make bets on specific-European companies can invest in ADR (American depositary receipt) shares, or foreign stocks that trade on U.S. stock exchanges such as the New York Stock Exchange. Well-known ADRs include telecom and wireless play Nokia, French drugmaker Sanofi S.A., Italian eyewear maker Luxottica, Dutch food giant Unilever and Swiss pharmaceutical company Novartis AG. Clemons cautions that investing in ADRs involves currency risk as the underlying assets you are investing in are priced in euros.
broad S&P 500 index gets nearly 8% of total sales from Europe, according to S&P Dow Jones Indices. But a handful of U.S. companies get a much larger share of their sales from Europe. Online travel site Priceline gets more than 70% of its sales from Europe, and tobacco company Philip Morris does nearly 57% of sales there, according to data provided by Fundstrat Global Advisors. iPhone maker Apple gets more than 23% of sales from Europe, while U.S. drugmaker Johnson & Johnson gets nearly 22% of its sales there.
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.