With Brexit and Trump fresh in the memory, financial markets were looking for the next domino to fall...

With major geopolitical crises averted… the risk in Europe now appears on the upside

January 2017 looked like it was the start of rough year for Europe. With Brexit and Trump fresh in the memory, financial markets were looking for the next domino to fall and the EU, with three major national elections, looked like a likely candidate. Five months on and with arguably the most significant political risks averted, the outlook for Europe is looking much brighter.

In France the scene is set for progress on broad economic reforms and further EU integration after President Macron unveiled his centrist cabinet last week. All this will be conditional on Macron’s party “Republic on the Move” achieving a majority or at least being able to form a workable coalition at the legislative election scheduled for June 11 and 18. Despite earlier expectations that this was unlikely, recent polls suggests that a majority might actually be within reach with Macron’s party set to win 27% of the votes in the first round, potentially leading to a final count of 280-300 of the 535 seats in the lower house. For first time in a long time it seems the political risks in Europe are actually to the upside. 

With record flows into European ETF’s…

Indeed Europe is currently one of the most attractive developed equity markets according to our Multi Asset Solutions team. They’re not the only ones, March and April each saw record flows into European based ETFs, largely driven by equity ETFs which added €2.3bn over April. Similarly in the US, $US6bn flowed into European equity ETFs, the highest on record, in the week following the election of Emanuel Macron. These flows, while not reversing the significant outflows seen in 2016, do suggest that global investors are warming to Europe in the lead up to summer.

Underpinned by above trend economic growth

Not only is Europe’s political outlook improving so is the economic one. Economic growth has stabilised, above trend, at around 1.7%/yr (YTD) and is likely to remain supported by continued growth in household spending and investment, while there is still further room for a pick-up in government spending. Unemployment continues to decline and wages, while still low compared to history, are beginning to recover, supporting consumption. Inflation remains below the European Central Bank’s (ECB) target but is on a sustainable upward trajectory and monetary policy is set to remain accommodative for the foreseeable future.

And corporate earnings stabilising…

In addition, earnings estimates for European equities are not being downgraded for the first time since 2008, a significant change from recent history. So, is it time the rest of us start thinking about a European summer?

Contribution to YoY Eurozone GDP growth

Source: Eurostat, CFSGAM as of 30 April 2017.

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