BofA-Merrill sees upside for European stocks after Macron win at the polls

Strategists at Bank of America-Merrill Lynch sounded a confident note on the outlook for European equities after Macron's win at the polls over the weekend, telling clients they saw ample potential upside for their.

To back up their optimism, they highlighted the fact that the results of the first round of voting are close to what pre-election polls had predicted, meaning chances are that predictions of a landslide win for the centrist candidate to the Elysee are correct.

From the standpoint of stockmarkets' fundamentals, they believe Macron's agenda of structural reforms adds upside potential to an already solid macroeconomic backdrop.

"We had argued that a victory for Macron would be bullish for European equities as it would remove downside tail risks associated with Frexit, be supportive of the cyclical upturn in Europe and provide upside potential from Macron's structural reform agenda.

"Moreover, political uncertainty has been a headwind to global investors re-allocating to Europe - we see significant potential for European fund flows to recover further," they said.

European corporates' strong operating leverage also pointed to upside risks to their forecast for 11% growth in Stoxx 600 companies' profits this year.

Valuations were also supportive, Bank of America-Merrill Lynch said.

On absolute basis, Stoxx 600 companies were changing hands on a price-to-earnings multiple of 14.9, compared to a high of 16.7 reached in April 2015.

On a free cash flow yield basis, they were offering 5.4% versus 4.5% one year ago, pointing to potential upside of 19%, BofA-Merrill said.

Stocks in Europe also offered upside when compared to their US peers, the investment bank said, trading at discounts of 5% and 19% relative to their average price-to-earnings and price-to-book value multiples of the past 20 years.

"Importantly rebounding EPS in Europe provide a platform for outperformance but year-to-date Europe has actually de-rated versus the US. Lower tail risks and recovering flows could support multiples here," they said.

"Potential beneficiaries from the rising odds of a Macron victory include Financials and the periphery (Italy) and domestic exposed stocks as Frexit risks diminish and confidence in the economic recovery is bolstered. Potential euro strength provides a relative downside risk for international exposed stocks. The news is supportive for our overweight Banks and underweight Autos. CAC should benefit relative to DAX."