Political Paranoia Gets Costly for Europe Bears Staying Away

(Bloomberg) -- Skepticism is again proving unhealthy for European stock bears who see a monster behind every door.

They were punished anew this week. French stocks are poised for their highest level since 2008, and regional benchmarks surged to levels not seen since 2015 after centrist Emmanuel Macron won the first round of the country’s presidential elections.

Again and again, politics are cited as a reason to avoid European equities, and again and again -- from the U.S. presidential election to votes in Turkey and the Netherlands -- the warnings result in investors kicking themselves for being overly cautious.

“Investors have looked at politics this year and used that as an excuse not to allocate to Europe,” Stephen Macklow-Smith, who helps manage about $2.2 billion of European equities for JPMorgan Asset Management in London, said in a telephone interview. “Assuming Emmanuel Macron wins in the second round, people will have no more excuses.”

Fund managers in recent months had cited a possible victory for right-wing, anti-euro Marine Le Pen in the French vote as the most pressing risk causing them to hold back on investing in European stocks. Opinion polls, which fairly closely predicted the outcome of Sunday’s vote, indicate Macron will win the final vote by a landslide.

That’s prompting investors to shift their focus to the region’s improving economic fundamentals. Macklow-Smith is among a slew of investors pointing to improving corporate profits and a sounder economic backdrop as factors that will lend further support to Europe’s stock market. Deutsche Bank AG’s Deutsche Asset Management moved quickly, upgrading European equities to overweight on Monday.

Bank Boost

Invesco Ltd., which manages about $835 billion, is especially positive on banks, arguing that a benign French election result could encourage the European Central Bank to turn less accommodative at some point this year.

“I would expect to see a resurgence of Europe as an investment area,” Matthew Perowne, a Henley-on-Thames, U.K.-based fund manager at the firm, said by phone, referring to equities. “If we have a favorable round two, which is our base case, then I suspect at some point in the second half, rates will become less negative, which is a big tailwind for bank earnings.”

The current bullishness harks back to the few voices in January who predicted European stocks might be the “pain trade” of the new year. Stephane Barbier de la Serre, a strategist at Makor Capital Markets in Geneva, said three months ago that “risks that populist candidates take power are very slim, so people are getting it wrong.”

Cyclical Stocks

A broad consensus among investors and analysts is that stocks reliant on economic growth have the most to gain now that a Le Pen presidency seems less likely, reducing her threat to the stability of the euro area. Cyclical shares including lenders and automakers led gains among industry groups in the Stoxx Europe 600 Index Monday. And recent strong data on German business sentiment and euro-area private-sector activity signal a pickup in the region’s economic momentum.

Still, the bullishness is nascent. Last year, European equity funds saw $113 billion in outflows, according to EPFR Global data. Strategists at Bank of America-Merrill Lynch predicted an increase in inflows if a runoff between Le Pen and Communist-backed Jean-Luc Melenchon was avoided. The return of international investors will be key to reversing last year’s trend, Perowne said.

“We had said for a while that Europe looked attractive as an investment destination, but had been holding back from further investment owing to political concerns,” John Wyn-Evans, head of investment strategy at Investec Wealth & Investment, wrote in a note Monday. “Europe has the potential for further recovery.”

--With assistance from Blaise Robinson

To contact the reporters on this story: Aleksandra Gjorgievska in London at agjorgievska@bloomberg.net, Justina Lee in London at jlee1489@bloomberg.net.

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net, Todd White, Namitha Jagadeesh