The next French President: Emmanuel Macron
By Richard Watt, Investment Commentator 
 
Political risks subside 
Perceived political risks in Europe have detracted from European equity performance over the past year, with around US$100bn flowing out of European markets in 2016. With the election of Emmanuel Macron as the next French President, much of that risk has been reduced and investors may now focus on the performance of European companies.
 
Here we look at the key benefits that the Macron win may bring to the European economy and its equity markets.
 
Pro-reform, pro-integration 
Macron is a reformist and pro-European. He is in favour of greater integration in Europe, the strengthening of European institutions and a common Eurozone budget that would protect from future economic shocks. He has campaigned on reforms of the labour market in France, reforms of the tax system and tax cuts, and raising the retirement age, which is currently one of the lowest in Europe. 
 
Along with this, he plans to invest EUR50bn into the French economy. This would be funded by reducing the size of the French state - by far the largest of any European country.
 
All of this would be hugely beneficial to what is a relatively uncompetitive French economy, and to the future strength and stability of the Eurozone.
 
Political risks diminishing 
Sentiment towards Europe has been particularly strong since the first round of voting in France two weeks ago, seeing European and French markets up 7-8%. With either the upcoming UK or German elections representing an existential risk to Europe, much of the political risk is behind us. Investors will likely focus on corporate fundamentals and earnings. 
 
Earnings turn
Since the financial crisis, while US companies have seen margins and earnings recover, European earnings are still below their peak. The underperformance of European stocks relative to US stocks has been exclusively driven by the lack of earnings delivery of European companies. 

European earnings revisions turning positive 

Source: Fidelity, Datastream, Morgan Stanley , data as of 6 Apr 2017. N12M ERR (%) = 12-month earnings revision ratio. 3MA = 3-month moving average.

What we are now seeing is a strong recovery in European stocks, with earnings starting to come through. Margins are recovering and the most recent earnings season in Europe has been the strongest in more than 10 years. 

Particularly compelling for European equities is their valuation. As they have been out of favour for much of last year they are trading at a multi-year discount relative to the US on a price-to-book basis. And today, record high numbers of European companies have a dividend yield that exceeds their bond yield.

European P/B vs US P/B

Source: Datastream, GS Research, data as of 31 March 2017. 

Percentage of stocks with dividend yield > bond yield

Source: Datastream, Goldman Sachs Global ECS Research, December 2016. Stoxx Europe 600.  

Conclusion
Europe has been significantly out of favour for some time due to political risk. The French result today puts much of this behind us and European equities are looking attractive compared to the US and other markets and asset classes. We are now starting to see companies deliver strongly on earnings, removing another key detractor from investor sentiment. 
 
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