European stocks fell yesterday after Emmanuel Macron, an independent pro-European reformist, won France’s presidential election. Macron defeated his rival the far-right Front National candidate Marine Le Pen with 66% of the vote.
Prior to France’s presidential election on Sunday, Euronext 100, the blue chip index of the pan-European exchange, hit a nine year high on Friday. However, after the outcome of the election confirmed a Macron win, the index dropped 5.3% to 1039 points on Monday.
Macron’s win had been widely anticipated, with financial markets pricing in his victory. Stocks rallied when Macron clocked a first-round victory last month.
According to Darren Ruane, head of fixed interest at Investec Wealth & Investment, the dip in markets yesterday following the outcome of the election show a small degree of profit-taking by investors who had benefited from this rally.
Cyrique Bourbon of Morningstar Investment Management warned investors not to price any short-term moves based on the outcome of political events.
A Brighter Outlook for Europe
Despite potential political headwinds, the forecast looks brighter for investors in European stocks as earnings and inflation have begun to pick up.
“More than two thirds of European companies beat earnings expectations in the first quarter, on average by 10%, as earnings grew 25%. This is encouraging, breaking with the trend of the past six years, and is boosting global asset allocators’ interest in Europe. Inflows have resumed in recent weeks, supporting Europe’s equity indices,” said Fidelity’s Victoire de Trogoff, portfolio manager of European equities.
David Moss, head of European equities with BMO Global Asset Management agrees, saying that the backdrop from European equities has been improving for some time as economic growth improves across the region.
“Both consumers and businesses become more confident and willing to spend and invest in Europe. With attractive valuations relative to other markets, especially the US, the issue restraining European markets and global investors from increasing allocations has been political. Sunday’s result removes the majority of the restraints we have seen,” said Moss.
Eurozone inflation is now at its highest level since 2013, rising to 1.9% in April, from 1.5% in March.
Macron’s election win should also ease global concerns about political risks in Europe, strengthen France’s credit rating and improve its economic outlook, Fidelity’s de Trogoff added.
“French company earnings could receive a 10% boost from Macron’s economic measures, which include new tax cuts and a plan to convert the current temporary reductions in social taxes into permanently lower rates. Macron also intends to raise investment by €50 billion over five years, which would benefit the energy, construction and IT sectors. The telecom sector could also see renewed consolidation,” said Vincent Durel, also a portfolio manager of European equities at Fidelity.
3 Undervalued European Stocks
With the outlook improving for the region, investors might want to look for stock picking opportunities in Europe – but undervalued opportunities are already rare. Using Morningstar Select we can see there is only one stock rated five-star by Morningstar analysts, meaning analysts believe the stock is trading significantly below their fair estimate for the share price. We pick another two stocks that are rated four-stars by Morningstar analysts.
Roche Holding (ROG) is the only five-star undervalued stock as rated by Morningstar analysts. Roche Holding is a Swiss biopharmaceutical and diagnostic company. The firm's best-selling pharmaceutical products include a variety of oncology therapies from acquired partner Genentech, and its diagnostics group was bolstered by the acquisition of Ventana in 2008, said Karen Andersen, healthcare strategist with Morningstar.
Roche's biologics constitute three fourths of its pharmaceutical sales, making the firm the biggest biotech in the world, said Andersen.
“We think Roche's drug portfolio and industry-leading diagnostics conspire to create sustainable competitive advantages. As the market leader in both biotech and diagnostics, this Swiss healthcare giant is in a unique position to guide global health care into a safer, more personalized, and more cost-effective endeavour,” said Andersen.
Anderson expects Roche to maintain a dividend payout ratio up of 50% going forward, implying mid-single-digit annually increases in dividends per share.
Telefonica (TEF) is the incumbent fixed-line and wireless telephone operator in Spain. It is rated as a four-stars by Morningstar analysts. It has the second-most wireless subscribers in the United Kingdom, and with the acquisition of E-Plus, it is now the largest wireless operator in Germany.
Telefonica is leading Europe in the movement to converged services, said Allan Nichols, senior equity analyst with Morningstar. He believes Telefonica's positioning in Spain sets it up for continued long-term growth, projecting an average annual revenue growth of about 1.8% in the company for the next five years.
SFR Group (SFR) is the second largest telecom company in France, with the most extensive fibre network, said Nichols. He thinks the firm is a very strong competitor with the fastest broadband speeds.
“We expect the firm's increased focus on marketing its faster broadband speeds will enable it to turn the business around, eventually leading to stabilisation in its wireless business and a return to revenue growth,” said Nichols.
