Finance

Mark Gilbert is a Bloomberg Gadfly columnist covering asset management. He previously was a Bloomberg View columnist, and prior to that the London bureau chief for Bloomberg News. He is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”

Emmanuel Macron's election as French president removes the risk that one of the founding members of the European Union might seek to extricate itself from the euro. That in turn should be the signal for equity investors to take advantage of a less febrile political environment and buy European stocks.

After several years of underperformance, economic growth in the euro zone has matched that of the U.S. for the past year or so.

Neck and Neck
Change in gross domestic product, year on year
Source: Bloomberg

That improvement is starting to feed through into corporate earnings and revenue. With first-quarter results in from more than 250 companies, or about a third of European stock by market value, the net number beating earnings expectations is on course to be the highest in more than a decade, according to Morgan Stanley. Those beating analysts' estimates for revenue are set for the best performance in at least 14 years, the bank said in a research report this week.

"The Strongest Season In Over a Decade."
European company results in first quarter
Source: Bloomberg

Amundi SA, Europe's biggest money manager with more than $1.1 trillion of assets, says it is overweight European and French equities, particularly compared with U.S. stocks. A recent spurt by European stocks, combined with a pause in U.S. equities, means the Euro Stoxx 600 benchmark index's gains have caught up with the Standard & Poor's 500 index in the past month or so.

Catching Up...
Total returns, including reinvested dividends, calculated in euros
Source: Bloomberg

On a longer-term basis, however, there's still quite a way to go before European stocks' previous underperformance relative to their U.S. counterparts is eradicated.

...But Still Behind
Total returns, including reinvested dividends, calculated in euros
Source: Bloomberg

In the foreign exchange market, traders who have been bearish on the euro for the past three years have finally reversed those negative bets on CME Group, which runs the world's biggest futures exchange. As of this month, net futures positions show traders are finally neutral on the currency.

Euro Bears Head for Hibernation
Net bets on the euro versus the dollar on the CME exchange
Source: Commodity Futures Trading Commission via Bloomberg

The U.K.'s decision to quit the European Union seems to have galvanized the remaining members to pull together, putting the bloc on course for a period of political unity. The European Central Bank is sticking with its unconventional measures to resuscitate the economy, a battle it finally appears to be winning.

What could go wrong? Economists at Citigroup warned in a research report this week that Italy could see the anti-euro Five Star Movement become the largest party in parliament, reawakening concern about a break-up of the common currency. Greece still has to implement about 100 measures to conclude its current bailout review and avert the risk of a default on debt coming due in July, with a bill headed to parliament this week.

Italy's merry-go-round of coalition governments, however, has been an ever-present on the European political scene for decades, and an election there may not come for another year. Meantime, even Greece's most vocal critics within the euro zone have lost their appetite for threatening to expel the nation from the euro project.  

The combination of an improved outlook for euro zone growth, a benign inflation environment and a central bank that's unlikely to echo the Federal Reserve in raising interest rates anytime soon gives European stocks the opportunity to outpace U.S. returns.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Mark Gilbert in London at magilbert@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net