With the first round of the French election in the rearview mirror, there are clear winners and losers. With Emmanuel Macron and Marine Le Pen facing the chosen two to face off in a May 7 election, Morgan Stanley says the outcome will be benign: markets will win.It will be interesting to see if Horseman Capital Management’s Stephen Roberts, who boldly proclaimed before the election that the result won’t matter and recommended buying European stocks despite election concerns several weeks ago listened to his own advice. Morgan Stanley’s Grahm Secker is on the list of those who recommended buying in Europe in March. Now, this analyst along with two others is reiterating their bullish call in the region, according to Global Macro Forum slides.

(Click on image to enlarge)

Macron, the well-connected centrist campaigning under an “independent label,” not Marine Le Pen, is expected to win in May

When well-connected political novice Emmanuel Macron garnered the most votes in the French election Sunday, garnering 23.7% among a broad field of contenders, it sent a sigh of relief among market participants, some of whom were aware of the deeper negative consequences if France were to leave the euro.

The former Rothschild investment banker ran as a centrist and “independent,” eschewing established political parties in his first attempt to gain elective office. While he is embracing the “outsider” label, Macron worked as deputy secretary general under current French President Francois Hollande, who quickly endorsed his presidential bid.

While Marine Le Pen was close in second place, at 21.7%, those handicapping the upcoming race are confident of a Macron victory, including Morgan Stanley’s Senior European Economist Daniele Antonucci, Chief European Equity Strategist Grahm Secker and Head of Global FX Strategy Hans Redeker.

Macron is expected to win in the second round with “high probability,” according to Antonucci, as Morgan Stanley’s analysis shows more than a 60% probability for such an event as all mainstream parties are endorsing Macron. Even those who voted for radical communist Jean-Luc Melenchon, who held negative views on the EU similar to Le Pen, are planning on voting for Macron by a 56% to 13% margin, Morgan Stanley noted.

In a presentation titled “After the French 1st Round,” the strategists outlined how they think the May 7 election will conclude and make investment recommendations on a European stock landscape that appears inexpensive.

(Click on image to enlarge)

Marine Le Pen aside – EPS valuations and global inflows reasons to invest in Europe, but watch geographical exposure

The euro area was already an improving economic region and will now strengthen further. As previously noted in ValueWalk, EU stocks trade at significant earnings per share discount to their US counterparts. With a degree of political certainty out of the way, the runway has a bit more clarity.

Morgan Stanley’s Secker, who predicted a positive outlook for European investing in March, continues to look at a recovery in earnings per share as the number one reason to invest in Europe. Many stocks are moderately below general EPS valuation statistics, with very few stocks significantly above fair value estimates.

The second reason Secker likes Europe is due to global inflows, which started to edge up prior to the French election and have been typically correlated with the price of European stocks.

All the positive factors should lead to price/earnings expansion in Europe, which is currently trading near 15 times earnings. By comparison, US stocks, measured by the S&P 500, trade closer to 18 times their earnings. Among stocks, Secker thinks banks are positioned for the highest upside. While some banks are up as much as 10% on Monday, Secker thinks the high end of the range for the banks following the election is 15%.

When investing in the euro area, be mindful of geographic exposure, The euro currency benefits certain countries more than others, with Ireland and Germany benefiting the most. The euro “is too strong” for certain regions, according to Morgan Stanley’s Redeker. Italy and Greece fare the worst, with France finding its inclusion in the euro to be only slightly disadvantageous.

All eyes now on May 7 election results

(Click on image to enlarge)