French elections, results allow markets to re-focus on earnings

The first round of the French presidential elections delivered an outcome close to both pre-election polls and market expectations, reversing the trends seen during the BREXIT referendum and the US presidential election in 2016.

This, combined with polls for the second round suggesting a wide lead for market-friendly Emmanuel Macron, should allow markets to focus on the ongoing economic strength seen across the single-currency area in 2017. Indeed, while US and UK economic data has shown signs of stabilising in recent weeks, data across the Eurozone suggests an economy that continues to accelerate. April purchasing manager surveys indicate little impact from electoral ‘uncertainty’ surrounding French elections among the continent’s corporates. Instead, the Eurozone economy is showing signs of ongoing acceleration in both the manufacturing and services sectors.

It has been this economic strength that has reversed the caution that many investors (including ourselves) began 2017 with. This was reflected in strong inflows seen into European equities in recent weeks, even ahead of the results of the first round of French elections. Although we believe that further flows into European equities are likely in the weeks ahead, investor surveys indicate that overweight positions in European equities are already nearing multi-year highs. In contrast, investors are holding the largest underweight positions in US equities since 2007. Therefore, from a flow and positioning perspective, some caution may be warranted especially given the relief rally following the French election.

However, as with post-election markets in the United States following the presidential elections, we encourage investors to focus on the economic growth backdrop and the outlook for earnings on the continent looking forward. Over the year-to-date, Eurozone equities have seen a consistent rise in earnings expectations in contrast to the weakening of expectations in the US. However, given the 6% rise in equities in the single currency area even before the post-election rally, the sustainability of the YTD rally will increasingly rely on further upgrades to current earnings expectations. Given the strong economic growth that has continued into the 2nd quarter, we expect the upcoming earnings season to deliver some surprises. Despite comparatively weaker growth trends in the United States, the US earnings season has already shown 75% of reporting companies beating expectations by an average of 6%, ahead of the 71% and 4% averages seen in earlier quarters.

Michaël Lok – Group Chief Investment Officer, Co-CEO Asset Management – Union Bancaire Privée (UBP)
Norman Villamin – Chief Investment Officer Private Banking – Union Bancaire Privée (UBP)
Patrice Gautry – Chief Economist – Union Bancaire Privée (UBP)