Europe Investors Bid Adieu to Political Jitters and Begin Buying

By Riva Gold and Georgi Kantchev Features Dow Jones Newswires

Investors aren't waiting for the conclusion of the French election to put money back into Europe.

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They are already flocking back, betting that the region has finally unshackled itself from fears of political turmoil.

Local stock markets just had their best week this year following the first round of the French presidential vote, and investors have poured money into the region's equity funds at the fastest pace since 2015. The euro climbed 1.6% against the dollar in its best week since July.

All this comes as investors start to look beyond political risks and focus on the continent's strong economic recovery.

"People are beginning to let go of European political risks as a theme," said George Maris, portfolio manager at Janus Capital. The underlying economy and earnings picture are becoming more evident now in Europe, Mr. Maris said.

Europe's buoyant equity markets are already reflecting much of that optimism, despite coming political events that had once concerned investors--chiefly the final round of voting in France's presidential elections and votes in Italy and Germany.

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Germany's benchmark DAX index reached a record in the week following the French vote, while the Euro Stoxx 50 index of blue-chip eurozone stocks climbed 3.5%, with advances in Europe led by the banking sector. In dollar terms, the Euro Stoxx 50 index is up almost 12% this year, nearly double the S&P 500's gains.

European equity funds recorded their strongest inflows since December 2015, with inflows of $2.4 billion in the week to April 26, according to EPFR Global data.

Eurozone markets have rallied since the first round of French presidential elections on April 23, when pro-European centrist Emmanuel Macron won more votes than both Marine Le Pen, who pledged to take France out of the euro, and Jean-Luc Mélenchon, a far-left antiglobalist candidate. Mr. Macron is now seen as a heavy favorite in the second round on May 7, when he will face Ms. Le Pen.

A solid election victory for the Dutch political establishment in March has also soothed fears of a continentwide lurch toward nationalism that had weighed on asset prices through this year.

Instead of politics, investors are focusing on economics and earnings.

Unlike previous years, analysts have continued to raise their projections for annual growth in earnings per share in the eurozone, according to J.P. Morgan.

First-quarter earnings in the Stoxx Europe 600 are expected to increase 5.5% from the first quarter of 2016, according to Thomson Reuters data.

Investors point to good signals from the economy. Business confidence and gauges of activity in the eurozone's manufacturing and services sectors rose to six-year highs in April, despite uncertainty ahead of the French vote.

"European growth is the best it's been since the global financial crisis, " said Robert Waldner, chief strategist at Invesco Fixed income. "The combination of supportive financial conditions and a solid economy should boost equities and credit markets in the region."

All this has ramifications for the European Central Bank as it contemplates an exit from a EUR2.3 trillion ($2.5 trillion) bond-purchase program. On Friday, eurozone inflation data for April came in higher than expected, reaching 1.9%. The ECB targets inflation close to 2%. The region has been battling low and at times negative inflation for much of the past three years.

The euro jumped after Friday's inflation figures to settle at $1.0897. "The market is pricing out political risks and is pricing in a less cautious [European Central Bank]," said Vasileios Gkionakis, head of foreign-exchange strategy at UniCredit Research.

Mr. Gkionakis expects that if Mr. Macron becomes French president, the euro would go past $1.10.

The ECB's signals in the months ahead are expected to be critical for the euro's performance toward the end of the year.

Risks remain. There is still a chance that Ms. Le Pen could win the French presidency, renewing questions about the future of the eurozone. Euroskeptic parties have a shot at winning Italian elections that will come by next year, at the latest, and Italy continues to struggle with weak banks and bleak economic prospects.

French economic growth slowed at the start of the year, while ECB President Mario Draghi highlighted Thursday that consumer prices remain subdued across the euro area.

For now, the European party continues.

Assuming French elections go as expected, "it at the very least removes the immediate existential concerns about the eurozone and euro currency itself," said Abi Oladimeji, chief investment officer at Thomas Miller Investment.

Write to Riva Gold at riva.gold@wsj.com and Georgi Kantchev at georgi.kantchev@wsj.com

(END) Dow Jones Newswires

April 30, 2017 07:14 ET (11:14 GMT)