DB Warns: Whoever Wins France, Euro Stocks Lose

Regardless of who wins the French election, European stocks are headed for a correction, according to Deutsche Bank AG. That’s a view at odds with many of the region’s strategists who expect relief even if  mainstream candidates lose.

The Stoxx Europe 600 Index has rallied 5.2 percent this year to reach a 16-month high this week amid an improving economic and earnings outlook. That has sent valuations to 5 percent above Deutsche Bank strategist Andreas Bruckner’s fair value calculation. Paired with smaller chances of economic data surprises, that means he thinks there’s little upside for the area’s equities even if a loss by the anti-euro Marine Le Pen removes uncertainty.

“The European market is priced for a lot of good news,” said Bruckner, a London-based strategist at the German lender. “There’s widespread agreement global macro momentum has been the driver of asset prices, and we see increasing signs this rebound is coming to an end."

The specter of a Le Pen victory has haunted the European stock rally all year. While most polls are projecting her defeat at the May 7 runoff, investors have become warier of political surprises after the unexpected triumphs of Brexit and Donald Trump last year. Her election would spark fears over France’s exit from the single currency -- and consequently its disintegration.

Yet Bruckner says the victory of a more mainstream candidate in the French vote will lead to a stronger euro and higher real bond yields, which can also be bad for stocks. While about $60 billion of inflows may return to Europe, the money won’t give fresh impetus for a further rally as such flows tend to lag market performance and have been priced in already, he added.

Bruckner joins a growing minority of analysts who are calling a halt to the European stock rally, with Oppenheimer saying technical analysis shows it’s time to take profits and HSBC arguing that an earnings recovery is unlikely to justify valuations. This will now be tested by the French vote, ongoing earnings season and downturn in economic data -- as seen in recent declines in both the euro zone and global Citi Economic Surprise Indexes.

Many analysts say a Le Pen loss will trigger a relief rally. As the risk of her winning has held back European stock inflows despite recent PMI improvement, shares should get a boost when she loses, Citigroup strategists led by Robert Buckland wrote in a report this month.

To Bruckner, the silver lining is the projected 9 percent growth in European firms’ earnings per share this year. The problem now is that he thinks stocks are just too expensive. The lender’s model for forward price-to-earnings ratio takes into account the euro area’s PMI, real bond yields and policy uncertainty.

Still, Bruckner is waiting on the sidelines until stocks revalue. “Once this correction has happened and a period of macro disappointment has passed, we’re happy to re-invest in this market again,” he said.


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