Why Macron win is only good news for equities

And so, another political banana skin for European equities is avoided. However, while Emmanuel Macron's victory over Marine Le Pen's far-right National Front party is welcomed by markets, the reaction Monday morning has been underwhelming.

Futures prices had indicated a sharp rally for stockmarkets both in London and the European mainland. And with Le Pen and her divisive and inevitably disruptive policies consigned to the wilderness for at least another five years, investors did react positively to pro-business Macron winning two-thirds of the popular vote.

But gains were short-lived, with bourses both in Paris and Frankfurt trading down within minutes of the opening bell. The FTSE 100 did better, but is struggling to stay in the blue Monday.

For clues as to why just look at the charts stretching back only a couple of weeks, and to Macron's win in the first round of voting. Since then the French Cac index has rocketed 7% to a nine-year high, the German Dax 5.5% to a new record, the euro around 1.7% versus the dollar, and FTSE 100 some 2.6% to a three-week best.

Clearly, buyers have run out of puff, as attention turns to French parliamentary elections mid-June. As we said last month, Macron has no natural political base in the national assembly, so he must build a team around him. It'll be interesting to see if he can achieve a governing majority or grand coalition.

Main priorities, as reported by analysts at Barclays, will be "simplification of the labour code, and of business procedures, a comprehensive reform of education and vocational training, cleaning up moral standards in the political sphere, and the launch of discussions with other member states aimed at reforming Europe, with a focus on euro area integration".

Attention also now shifts to the European Central Bank (ECB), where policymakers have been waiting for a Macron win before further tapering their bond-buying programme.

"Investors should expect the ECB to start drip feeding 'taper talk' over the next week, as it tries to avoid a US 'taper tantrum' scenario as in 2013," writes Jorgen Kjaersgaard at AB European Income Portfolio. "We expect a clearer message on the QE tapering timeline will emerge at the ECB's next monetary policy meeting on 8 June, much earlier than many in the market believe."

But, despite the dip in equities Monday, there's plenty of reason to stick with them. Still in a definite growth cycle, and outperforming the US economy in the first quarter, Europe remains an attractive investment.

Financial stocks are tipped to do especially well, as are companies making money from European consumers, although, with a firmer euro, watch out for domestic firms doing big business outside the eurozone, warns SYZ Asset's top economist Adrien Pichoud.

But earnings season has gone well, so far. In fact, more companies are beating sales and earnings forecast than at any time in the past five years, and 70% of companies reporting have triggered upgrades to full-year profit estimates, led by banks and real estate.

Intu Properties, Land Securities, British Land and Hammerson are already among the leaders in London Monday. Even struggling fashion retailer Next is in the blue, offsetting losses among heavyweight miners Antofagasta, Glencore and Rio Tinto following much slower growth in Chinese exports last month.

According to Barclays, the ratio of companies beating sales and EPS estimates versus those missing estimates is currently at an all-time high.

Time to buy 'value'

And it's value stocks that have formed "the backbone of this record-breaking results season", points out Barclays, which still prefers 'value' over 'quality'. It also reminds us that its FTSE 100 year-end forecast remains intact at 7,600.

Rivals over at UBS agree as "value gaps have re-opened". After beating growth stocks by 20% between last summer's referendum vote and January this year, there was a pause ahead of upcoming Dutch and French elections. Value has underperformed growth by 6% since, and UBS think it "looks compelling" again.

As at Barclays, it likes those earnings beats, Macron's win which could see some reform getting through, and those value gaps which are now back above March 2009 and near July 2012 levels.

"While US Treasury yields matter, if earnings settle up and politics settle down, value should do well," says UBS.

As part of its research, the broker's bottom-up analysts have picked 27 stocks that lagged peers in the decade following the financial crisis and are now cheap versus peers on at least two of three key metrics – price/earnings (PE), price-to-book (PB) and dividend yield.

UK-listed shares that make the grade include Ladbrokes Coral with potential upside of 43%, according to UBS. BP and Barclays are also in, tipped to rise by 16%, and Imperial Brands at 13%.

Elsewhere, there's single-digit upside to UBS price targets at Diageo, Intu Properties, Travis Perkins and William Hill.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.