‘Stocks to fall’ after French election

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

The Stoxx Europe 600 Index has rallied 5.2% this year to reach a 16-month high this week amid an improving economic and earnings outlook. That has sent valuations to 5% 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 far-right, anti-euro Marine Le Pen removes uncertainty.

“The European market is priced for a lot of good news,” said Mr Bruckner, a London-based strategist at the German lender.

“There’s widespread agreement that global macro momentum has been the driver of asset prices, and we see increasing signs this rebound is coming to an end.”

The spectre of a Le Pen win 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 Mr 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 €56.5bn of inflows may return to Europe, the money will not give fresh impetus for a further rally as such flows tend to lag market performance and have been priced in already, he said.

Mr Bruckner joins a growing minority of analysts who are calling a halt to the European stock rally, with Oppenheimer & Co saying technical analysis shows it’s time to take profits and HSBC Holdings 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 the eurozone 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 wrote in a report this month.

• Bloomberg