By: Josh Pritchard
Voters in France have elected former economic minister Emmanuel Macron of the nascent En Marche! party as president. Macron’s victory is likely to be seen as a rejection of the populist, anti-European Union sentiment that saw Brexit approved in the United Kingdom in 2016. The defeat of National Front candidate Marine Le Pen also signals the French electorate’s refutation of the nationalistic, anti-immigration, and anti-globalization ethos that helped propel Republican Party candidate Donald Trump to the White House earlier this year.
Watching the Volley: U.S. vs. European Equities
Steady if inconsistent growth in the American economy since Q2 2014 has helped put U.S. stocks in a favorable position among many investors. The S&P 500® Index1 has outperformed the MSCI EAFE Index2 five of the last six calendar years. However, a recent increase in economic activity across the Euro region could be bolstered by the implied endorsement of the European project by the French public evidenced by Macron’s election win. “The outlook for European equities continues to improve,” according to Esty Roditi, Investment Specialist with Natixis Investment Managers*. “This is supported by improving growth, better earnings, and more attractive valuations.”
Where the Brexit vote represented a lightning strike to the future prospects of the European Union’s common currency and market, a Macron presidency has the potential to help reaffirm the organization’s future. Moreover, price-to-earnings,3 price-to-cash flow,4 and price-to-book value5 ratios suggest potential value opportunities in European stocks as measured by the MSCI Europe Index6 versus their U.S. peers in the S&P 500®.
Historically,7 the S&P 500®, the MSCI EAFE Index, and the MSCI EM Index,8 have demonstrated a notable performance rotation. As the graph below depicts,9 the S&P 500® outperformed the MSCI EAFE over five of six years between 1995 and 2000, while the MSCI EM Index outperformed the S&P 500® for seven of eight years between 2000 and 2008. Since 2008, the S&P 500® has outperformed both the MSCI EAFE and MSCI EM over six of eight years through 2016.
Performance data shown represents past performance and is no guarantee of, and not necessarily indicative of, future results. It is not possible to invest directly in an index.
Mind the International Gap
Changing political and economic dynamics in Europe could mean that some financial advisors and their clients may want to consider how their portfolios are weighted across U.S. and international equities and whether or not a rebalancing makes sense. A range of strategies are available to investors interested in international allocations. While international equities may not be suitable for all investors, opportunities domestically and internationally could provide avenues to portfolio diversification and growth potential. Individual investors can work with their financial advisor to help determine their financial goals and risk tolerance.
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1 The S&P (Standard & Poor’s) 500 Index is an index of 500 stocks often used to represent the US stock market.
2 The MSCI EAFE Index is a stock market index designed to measure the equity market performance of developed markets outside of the U.S. & Canada. EAFE stands for Europe, Australasia, and Far East.
3 Price-earnings (P/E Ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings.
4 Price/cash flow ratio (P/CF) is used by investors to evaluate the investment attractiveness, from a value standpoint, of a company’s stock. This metric compares the stock’s market price to the amount of cash flow the company generates on a per-share basis.
5 Price-to-book value (P/BV) is a ratio used to compare a stock’s market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter’s book value per share.
6 The MSCI Europe Index captures large and mid-cap representation across 15 developed markets in Europe. With 446 constituents, the index covers approximately 85% of the free float-adjusted market capitalization across the European Developed Markets equity universe.
7 Performance data shown represents past performance and is no guarantee of, and not necessarily indicative of, future results. Index returns are not intended to imply any future performance of any investment product.
8 The MSCI Emerging Markets Index consists of 23 countries representing 10% of world market capitalization.
9 Source: Bloomberg/Natixis Investment Strategies Group (ISG)
*Natixis Investment Managers consists of Natixis Distribution, L.P., Natixis Advisors, L.P., Natixis Investment Managers S.A. and its business development units across the globe, and the French holding company Natixis Investment Managers, parent to the affiliated investment managers and distribution companies.
Information contained here is believed to be accurate and reliable at the date of printing, however, Natixis Investment Managers Canada LP cannot guarantee that such information is complete or accurate or that it will remain current. The information is subject to change without notice and Natixis Investment Managers Canada LP cannot be held liable for the use of or reliance upon the information contained here.
Investing involves risk, including the risk of loss
Foreign and emerging market securities may be subject to greater political, economic, environmental, credit, currency and information risks. Foreign securities may be subject to higher volatility than U.S. securities, due to varying degrees of regulation and limited liquidity. These risks are magnified in emerging markets.