Is Macron’s win the icing on the CAC?

May 9th, 2017 | By | Category: ETF and Index News

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By Lyxor’s Cross Asset Research Team. Lyxor offers a comprehensive suite of European broad market, sector, smart beta and single country ETFs.

Markets react to Macron win

Lyxor reported over €400m of net inflows into ETFs tracking the CAC 40 Index between 24 April – 3 May 2017.

Investors breathed a sigh of relief after centrist, pro-EU candidate Macron’s victory in the 1st round of French elections. Since then, European markets have come out swinging. Now he’s secured the presidency, is another surge likely? In our view, the answer is “oui”

Go with the flows
Since 24 April, investors have been ploughing money into ETFs tracking the CAC 40 index, the main benchmark for French blue-chips, with net inflows totalling €400m over the period (Data as of 3 May 2017). Those flows may redouble now we have the definitive result. Political risk seems to be easing and European markets look set to soar.

Broad European indices offer one route but investing in individual countries may prove more rewarding, provided you’re in the right place at the right time. At Lyxor, we give you more ways to explore this story than any other provider. Right now, we see:

French equities in the spotlight
French equities could be the clear winners. The CAC 40 has lagged peers like Germany’s DAX for some time. Now political risk has eased, its catch-up potential is clear. Macron’s economic programme, including housing tax cuts, labour market reform and significant savings in public spending is perceived as market-friendly. Parliamentary elections present a potential obstacle, but Le Pen’s loss means the picture is positive overall.

The three key sectors for the CAC 40 benchmark are industrials, consumer discretionary and financials – all cyclical, and all likely to do well if markets recover. You could dig deeper again with the CAC Mid 60 Index. Nearly half of its constituents are industrials and consumer discretionary companies, so it could be another way to play a French recovery. Watch this space should Macron get the majority he needs to force through his reforms in full. For now, the polls suggest he could.

Italy: exposure to banks could help
We see potential in Italy, but can’t ignore the threat of snap elections later this year. Life wouldn’t be the same without some political risk somewhere!

Should that threat be averted, Italian equities could ride the wave created by a Macron presidency. The FTSE MIB comes with great catch-up potential for two main reasons: attractive valuations and its heavyweight financials exposure (33%+). Companies like Intesa Sanpaolo, Unicredit and Generali account for some of the top stock weights.

Spain: a better beta play?
The elephant in the room is the potential for another banking crisis in Italy. Headlines haven’t been overly kind to recapitalisation-seeking banks like Unicredit and Banca Monte dei Paschi di Siena. If you share their view, you could turn towards Spain’s IBEX 35 instead.

The Spanish economy is much healthier than it was, but the country’s stocks are yet to reflect that improvement. There’s plenty of room for them to grow given the European recovery, easing political risk and attractive valuations. The IBEX 35 is dominated by cyclical stocks – financials account for a third of the index, while cyclical sectors in general account for around two thirds. It generates around 20% of its revenue from Latin America, so improving outlooks for Brazil (better growth, better government) and Mexico (Trump’s softer stance on trade) bode well.

The Greek wild card
The familiar, and slightly dispiriting, story of negotiations between Greece and the Troika – the European Commission, the ECB and the IMF – on the country’s spiraling debt took another turn last week. A bailout agreement was made, which should lead to a vote of additional austerity measures by 17 May, and the disbursement of another tranche of the aid package ahead of looming debt repayment deadlines in July.

It is probably too early at this stage to take a definitive stance on Greek equities: debt relief isn’t guaranteed, and valuations seem expensive. But 10 years of underperformance suggest there is some room to catch up if the path to debt relief can be smoothed.

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