NN-IP: Vive l'Europe!

As expected, Emmanuel Macron was chosen as the new French President. Eventually, the result was even stronger than the previously reliable polls had predicted, as it was probably underestimated how big the resistance of Melenchon and Fillon voters (in the first round) was to vote for le Pen. Most of them eventually voted for Macron or abstained rather than voting for Le Pen. Even with this better-than-expected result for Macron, it remains uncertain how effective Macron will be as a President. Much will depend on the outcome of the Parliamentary election in June and it remains far from clear if Macron will get enough support to put the majority of his reform plans into practice.

It is important to note, however, that this is especially relevant for his domestic agenda on crucial topics as labour and tax reform, but less so for his ability to more closely cooperate on the European level, most notably with Germany. The latter will most likely be possible and therefore the core alliance of the European project seems to have strengthened as a result of the election result in France (and might strengthen further after the German elections which seem likely to create a larger role for the SPD).

For many in Europe this will be felt as a relief, as it allows the current recovery to build further and sends a positive signal on more constructive cooperation within Europe on the political front. It is yet another example that populism in Europe remains a threat rather than the directional force for government policy that it has become in the UK and the US. We see this as a modest positive for markets in the near term, but also acknowledge that most of the "good news" on Macron was already priced in recent weeks. However, especially European growth assets like equities stand well positioned to benefit from this news. It takes away the largest risk factor that was visible to markets at this point and allows investors to re-focus on the strength of underlying fundamentals. With the European economy in its strongest recovery since 2010 and European earnings expected to rise at a solid double-digit pace in 2017, the future for European equities looks bright.

The latter is currently our preferred spot in global financial markets from an asset allocation perspective. More in general, we remain tilted towards risk assets and negatively skewed towards government bonds. We observe a remarkably widespread and synchronized recovery in the global business cycle and in corporate earnings. Meanwhile, inflation and monetary policy normalization are progressing gradually as well. On its own this is not a major risk for bonds (part of this is already priced), but the risk skew for an acceleration in the unwinding of unconventional policy measures (QE and balance sheet policy) is clearly negative for the bond market outlook.

On top of all this, very little signs of exuberance among investors are seen. The massive flows into fixed income instruments from the last decade have not yet started to reverse in a sustainable manner, while more short-term oriented indicators of sentiment and positioning of active investors do not suggest excessive risk appetite.
Only in equity space some signs of 'overboughtness' and short-term complacency (an unusually low level of the VIX).