French Election Outcome Favorable for Financials
Over the past several quarters, we have been positioning our international equity strategy in a more cyclical direction, recognizing that a broad-based global economic expansion was taking hold. Financials has been a particular area of focus, specifically the European banking sector, based on a range of catalysts:
- Positive GDP growth trends should stimulate demand for business credit and reduce non-performing loan losses.
- Bank capital ratios have been strengthened, reducing the likelihood of financial distress or dilutive equity issuances.
- Evolving European banking regulations (i.e., Basel IV) appear to be less restrictive than originally feared.
- Steepening yield curves should boost banks’ net interest margins.
- Bank valuations (price/cash flows, price/book, etc.) are attractive relative to our investment universe as well as their own long-term averages.
As we’ve been increasing our financials exposure, we’ve been keeping close tabs on the political climate in the European Union. Post-Brexit, the concern has been that the election of populist candidates in other EU nations could create a ripple effect that could potentially change the path forward for the euro region.
The headwinds of electoral uncertainty began to subside in March with the prime minister election in the Netherlands, when the conservative incumbent Rutte defeated the populist challenger Wilders. Of even greater significance were last weekend’s first-round results of the French presidential election which saw the centrist (and anti-Frexit) candidate Emmanuel Macron rise to the top of a crowded field that included far-right leader Marine Le Pen. Macron and Le Pen now advance to a runoff election on May 7 that will determine the winner. While a plausible path to victory still exists for populist Le Pen, expectations are for Macron to prevail, lifted by the support of a consolidated coalition of supporters from the eliminated candidates.
The French election outcome removes (for now) much of the lingering political uncertainty, and we believe shines a new light on positive fundamentals underpinning the European banking sector, which have rallied strongly. We are optimistic this development will prove a key waypoint on the path forward that will see fundamental valuation return to the fore of what drives stock prices, and the EAFE universe begin to recover from five-plus years of significant cumulative performance lag relative to U.S. markets.
The commentary is the opinion of the subadviser. This material has been prepared using sources of information generally believed to be reliable; however, its accuracy is not guaranteed. Opinions represented are subject to change and should not be considered investment advice or an offer of securities.
Past performance is not a guarantee of future results.
Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.