Vive la France!
Partisan politics aside, the victory by Emmanuel Macron and his pro-Europe, pro-business En Marche party in France’s presidential election on Sunday is positive for the European credit and equity markets.
Viewed by many as a referendum on France’s status as an indispensable member of the European Union (EU), Macron’s win proved a resounding victory for the pro-Europe camp. The results stand in stark contrast to the United Kingdom’s 2016 vote to leave the EU and come on the heels of an election in The Netherlands, in which voters also rejected a far-right anti-Europe candidate.
Looking ahead, the German federal elections in September 2017 appear likely to continue the trend and produce market-friendly results. German Chancellor Angela Merkel’s Christian Democratic Union/Christian Social Union party maintains a strong lead in polls and is demonstrating strength in regional elections.
For all the investor hand wringing over Europe’s political challenges, the “make-or-break year of 2017” will likely pass without incident. The most important event, if not the biggest surprise, was Macron entering his victory party not to “La Marseillaise,” the French national anthem, but instead to “Ode to Joy,” the European anthem. This would be equivalent to Donald Trump being introduced at his victory party to the ode of NAFTA. This was a big statement from Macron about his commitment to Europe and sets the tone for his presidency. Make no mistake, the European project and all its trappings – a single market, free labor mobility across most of the Continent, and decades of peace and stability – will persist well into the future.
EU, European Markets Strengthening
Investors who have been paying too much attention to European politics, may be under-appreciating the sound economic recovery taking place across the Continent. It’s amazing what can be accomplished when policymakers shift their focus from austerity and tighter monetary conditions and instead deploy counter-cyclical measures to support growth (sarcasm off).
- Eurozone GDP rose by an annualized rate of 2% in the first quarter of 2017, more than double the U.S. growth rate over the same period. That’s to be expected. The U.S. is already much further along in the economic cycle. While U.S. economic activity has been surprising to the downside, the Citi Eurozone Economic Surprise Indices have been climbing since early 2016 (Exhibit 1).
- Credit growth has turned positive in Europe (U.S. credit growth turned positive as early as 2009) and growth and corporate earnings have been following in kind.
- A significantly weakened but now relatively stable euro has provided a nice tailwind to the profitability of Europe’s many multi-national businesses.
Seen through the lens of the credit market, this European economic cycle has a long way to run.
The financial markets have certainly noticed. No sooner had investors positioned themselves for a more-protectionist U.S. and disruptive political outcomes in Europe, than did European markets begin climbing the “wall of worry,” as they so often do. To date, the MSCI Europe Index has outperformed the S&P 500 Index by 6.8% year-to-date (12/31/16 to 5/5/17).1 Valuations, nonetheless, remain attractive, compared with the U.S., as expectations for future European growth and corporate profitability have been lower.
Further, monetary policy is likely to be accommodative into 2018 as the European Central Bank remains committed to supporting the nascent expansion. Investors expecting the U.S. to continue its prolonged period of outperformance over European credit and equity markets may be in for a surprise.
A famous French proverb says “Qui n’avance pas, recule.” Translation: Who does not move forward, recedes. It has been a challenging decade for Europe, both politically and economically. On both fronts, the Continent is moving forward and likely ever-closer together.
In the fall of 2008, Warren Buffett made news with a New York Times op-ed entitled, “Buy American. I Am.” Today, I say: Buy European. I am.
1 Source: Factset, as of 5/5/17.↩
The MSCI Europe Index captures large and mid cap representation across 15 Developed Markets countries in Europe.
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