Marine Le Pen’s win in the first round of the French presidential elections is an exciting story.
It’s high stakes stuff. If she wins, she’ll try to take France out of the euro, which would cause the mother and father of all financial crises. Not to mention the rest of her plans for France.
Lots of people are worked up about Le Pen. The Mail called the result “A New French Revolution”. The Times said “French elites had been humiliated as outsiders sweep to victory”.
It’s understandable really – after the year we’ve had, another big win for the right seems to fit the story.
Well I’m going to nail my colours to the mast here: Le Pen hasn’t a chance in the final election. She’s going to lose in a landslide, like her father did at the same stage in 2002.
Le Pen is an exciting story but she’s a distraction. Something much more interesting is happening in France, and right across the eurozone. The economy is coming back fast.
Why Le Pen will lose
First thing’s first – why am I so sure that Le Pen isn’t going to upset the establishment, like Trump and Farage?
Look at the polls. Trump was 2-3% behind Clinton in national polls, which is within the margin of error. He lost the national count by about 2%, but won on the electoral college.
In the UK, Remain led Leave by an average of 2-3% for most of the campaign. Again, that’s within the margin of error. And polls in the final month had it neck and neck.
In other words, the polls forecast a pretty close election in both cases. The establishment experts were overconfident – not the polls.
Le Pen is a different matter. She’s polling way, way behind her rival, Emmanuel Macron. The same polls which predicted the first round of the French election to within a percentage point or so have her at 26 percentage points behind.
Her father got to the same position in the 2002 French election, and got clobbered.
Europe is waking up
Le Pen is dominating the news, but a much bigger story is happening in Europe. The eurozone economy is finally waking up.
With the exception of Germany, the eurozone has been asleep since 2008. Things were starting to tick up in 2011, but a disastrous interest rate hike put paid to that.
Here’s a chart showing how eurozone stocks performed relative to US stocks since 2010. Eurozone stocks are in blue. The chart shows that since 2010, the S&P has grown by 111% while the euro stoxx index has grown by just 43%.
Now here’s another chart. This one looks at the same two indexes since the start of this year, priced in terms of euros.
European stocks have rallied hard since the start of the year. They’re up nearly 9%, and I think there’s more to come. Here’s why.
Reasons for confidence
A bunch of things are coming together at once for investors in Europe.
- Consumers and businesses are optimistic about the future. German businesses are at their most confident since 2011. French businesses are at their most confident since 2011. And Dutch consumers are at their most confident since 2001.
- Le Pen is fading. She may be through to the run off, but Emmanuel Macron has an unsurmountable lead of 26 points.That’s good for the European economy because Le Pen is a lunatic and Macron is a sensible, centrist, neoliberal type. Goldman Sachs has estimated that every 10% rise in the likelihood of Le Pen winning the French election meant the euro dropped 2¢ against the dollar. And on the news that Macron had beaten Le Pen in the first round, the French, German, Italian and Spanish markets rallied by an average of 4%.
- The ECB is still printing money. The ECB has historically been reluctant to print money. But in the last two years they’ve warmed to it. Now the ECB is printing, long after the UK and US stopped. That’s a “wind at the back” of the eurozone economy. And the ECB has sent no signal that it’s about to slow down.
- European stocks are still cheap. The CAPE ratio is a crude measure of how expensive or cheap a country’s overall stock market is. According to CAPE, the US trades at an extraordinarily expensive 27.5 times cyclical earnings. Not so in Europe. Spain and Italy trade at a CAPE of 13, France at 19, and Germany at 19 also. In other words, eurozone stock valuations still have plenty of runway ahead of them.
A preview of 2020?
I’m just back from a week in Dunfanaghy, a little village in North-West Ireland.
Ireland’s always been a funny one. It’s always been the most “out of sync” with the rest of the eurozone.
When Europe was warm in the 2000s, Ireland was red-hot. When Europe was cool around 2010, Ireland was frozen. And now Ireland’s economy is running hot again. Ireland is a more extreme version of Europe’s economy; either in a white-hot boom or a crushing depression.
Ireland in 2017 might be a preview of where Europe is going in the next few years. House prices have rocketed in recent years. The stock market is trading at a cape of 33. And it’s tough to get parking in tiny Dunfanaghy on a Tuesday afternoon.
So if you’ve been looking at the cheap valuations to be found in Europe over the last few years, and tempted to dip your toe… now might be the time to act.