Le Pen defeat makes Europe an attractive 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 post-election, even though Macron must still build a political coalition after parliamentary elections in June if he is to get things done. Still, investors are back to making investment decisions based on things like 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 in 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%.
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Putting money to work in European stocks makes more sense given that they are trading at less-expensive valuations than U.S. stocks, says Isabelle Mateos y Lago, chief multi-asset 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:
• Invest in Europe-focused funds. U.S. investors can invest in broad baskets of European stocks via low-cost exchange traded funds. Examples include Vanguard FTSE Europe ETF (VGK), SPDR Euro Stoxx 50 (FEZ) which invests in 50 of the eurozone’s largest companies, and iShares Europe ETF (IEV). Investors that want to bet solely on France’s stock market or Germany’s equity market can invest in country-specific funds.
• Buy European shares that trade in U.S. Active investors that 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 like the New York Stock Exchange. Well-known ADR’s include telecom and wireless play Nokia (NDK), French drugmaker Sanofi S.A. (SNY), Italian eyewear maker Luxottica (LUX), Dutch food giant Unilever (UN) and Swiss pharmaceutical company Novartis AG (NVS). Clemons cautions that investing in ADRs involves currency risk as the underlying assets you are investing in are in priced in euros. So, all things being equal, if the dollar strengthens vs. the euro, the value of your investment will fall; but if the euro gains vs. the dollar, your investment will rise in value.
• Buy U.S. stocks with strong sales in Europe. The 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 (PCLN) 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 (AAPL) gets more than 23% of sales from Europe while U.S. drugmaker Johnson & Johnson gets nearly 22% of their 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.
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 large-company 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.
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