Europe is further behind in the business cycle. There are many encouraging signs about the economy, yet the markets have not really rallied despite being attractively valued. The question is: Why? A lot of investors are worried about the French election.
So far, we’ve been consistently surprised by the political outcomes. And I suppose there is a nonzero probability that Le Pen could surge in the last minute and win the polls. On that news, I would expect a number of events, such as the underperformance of the French debt and potential decline in the euro.
However, we do think that those would be short-lived. She does not have the parliamentary majority to actually pass through significant reform. And once the implications of exit become clear, we do think that some of the more aggressive pronouncements are likely to fall short.
We believe there are times you get paid to take risk, and as a result, we feel investors should add to Europe now, and then add more following the election.