H&W in the Media

European stocks poised to outrun US equities


By Kevin D. Mahn, president and chief investment officer, Hennion & Walsh Asset Management

Emmanuel Macron won the run-off contest this past weekend over Marine Le Pen and will become the next president of France on May 14, 2017. At the age of 39, Macron will become the youngest president in France’s history and is a relative newcomer to the global political stage. Seen as more of a centrist candidate compared to the right leaning Le Pen, Macron is expected to maintain France’s position with the European Union and continue to use the euro as its currency.

The victory was largely expected and the actual polling results held true to form with Macron winning approximately 65% of the votes cast. Many investors were surprised on Monday when European stock prices moved slightly lower, as most thought that the “status-quo” result would lead to an upswing in European stock prices. We believe this short-term behavior is more related to the widely recognized “buy the rumor, sell the news” trading philosophy than it is a referendum on the investment community’s outlook for a Macron presidency. Despite this, there is still quite a deal of uncertainty over how Macron will govern and if his policies will be supportive of future economic growth in France.

The Macron election does remove one of the clouds lingering over the European continent in that a Le Pen victory could have led to France being the second country, behind Great Britain, to announce its intentions to leave the European Union (EU). This second departure could have been even more of a market disruption than Brexit because France is currently Europe’s third largest economy, behind Great Britain and Germany, and because France, as opposed to Great Britain, uses the euro as its base currency. However, since this will not happen, a certain sense of calm has returned to the eurozone, at least until the next scheduled election takes place or until the next country within the EU, such as one of the P.I.I.G.S. (i.e. Portugal, Italy, Ireland, Greece and Spain) countries, experiences its own set of financial difficulties.

While Italy is not scheduled to go to the polls until 2018, Germany’s federal election is slated for September 2017. Incumbent Angela Merkel is running for her fourth term as chancellor but will likely face opposition from candidates in favor of Germany leaving the EU and the euro currency. As a result, this will be a key election to follow as Germany remains the critical cog within the overall European Union wheel. While a Merkel loss is not currently expected, should a German referendum ever result in a vote to leave the European Union, the EU would likely not survive longer term. A similar fate for the euro could follow under such a scenario. That type of scenario would have no historical precedent and thus lend itself to an environment of great uncertainty, and likely periods of volatility, for global investors.

We, at Hennion & Walsh, will continue to pay close attention to all of the key upcoming elections in Europe over the course of the next year. As it stands now, recognizing all of these highlighted possibilities and associated risks, international equities seem to be worthy of strong consideration for globally diversified, growth portfolios given relative valuations and economic growth prospects.

Momentum appears to be on the side of equities of the international developed market and emerging market versus domestic equities thus far in 2017. Consider the returns for certain geographically representative exchange-traded funds (ETFs) provided in the chart below.

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