Investors’ Outlook: Continental breakfast

Continental breakfast

The Old Continent’s political landscape came under scrutiny last month after European parliamentary elections. From Germany to the Netherlands and from Italy to Spain, the results showed a significant drift to the right. In France, President Emmanuel Macron called a snap election after the far-right National Rally party gained significant traction. That stirred uncertainty about the country’s political course, fanned fears of a "Frexit", and triggered a selloff of French equities, which weighed on other European markets.

Through the lens of an investor, we think Paris (and Europe, for that matter) is a good idea right now. The political development has put pressure on asset prices within the Eurozone. We are tuning in to an overlooked part of the menu: the potential of European stocks. The region’s stocks have been lagging behind their US counterparts, with the Stoxx Europe 600 Index struggling to keep pace. They also look relatively undervalued, presenting a good opportunity for investors, in our view. This is one of the reasons why the Investment Committee decided to upgrade Eurozone equities to overweight from neutral at its most recent meeting.

Despite widespread focus on discontent and anger, particularly around issues like mass immigration and climate-change policies, as well as concerns over how the shift will affect policies on trade and regulation and market stability in Europe, the center-right continues to dominate the region's parliament. This suggests that the balanced policy approaches are likely to maintain their influence, indicating that the situation in Europe is more stable than it might appear.

A power shift in French parliament could see increased public spending amid an EU deficit procedure. But foreign and defense policy chiefly fall under the presidential purview in the French political framework. Uncertainty around the country’s stance on Europe is likely to be contained until the next presidential election, slated for spring 2027.

Across the pond, the US labor market seems to be showing more signs of cooling, losing some of its previous momentum. Job openings have declined, and wage growth is moderating, suggesting that the post-pandemic hiring boom is tapering off. Against this backdrop, the Fed has signaled just one cut later this year. In a global context, it appears that inflation is no longer much of a problem, as the world has seen price pressures easing to manageable levels. This has been reflected in some central banks moving ahead with rate cuts while the Fed is currently in abeyance, pending more clarity on balancing inflation control and economic growth.

Similarly, this publication will be taking a hiatus for the summer. We’ll continue to monitor global market developments and return with a new spread of ideas for our September edition.

Savor the read and enjoy your holiday. Europe is always a good idea.