Johnson's victory could turn things for European market that lost $100 bn

The U.K. stock market, which has been among the world's strongest underweight positions in the years after the Brexit referendum surged on Friday after the election results

Boris Johnson’s decisive victory may prove to be a turning point not just for the U.K. but for the entire scorned European stock market.

The Conservative Party’s win filled investors with optimism that a major political risk related to Brexit will soon be removed, sending the European equity benchmark near a record high. Goldman Sachs Group Inc. lifted its forecasts for both European and U.K. indexes following the election results.

Fears that the U.K. might crash out of the European Union without a deal have been a significant driver of $100 billion in outflows from European stock funds this year, the largest among major regions. And with the U.S.-China trade deal providing additional risk-on fuel, now could be a transformative moment for European equities, say the likes of Colombo Wealth SA and Bank of New York Mellon Corp.

“We are setting up the basis for a new Europe -- it is a major game changer,” said Alberto Tocchio, chief investment officer at Colombo Wealth in Lugano, Switzerland. “Most investors are still severely underweight U.K. This has to change quickly and this will also be beneficial to Europe for a global re-rating.”

Although European equities have rallied more than 20% this year, many fund managers recoiled from a market plagued by political and economic concerns. However, in mid-October the mood started to shift and outflows turned into tepid inflows after Johnson gained parliamentary support for the principles of his deal with the EU.

The U.K. stock market, which has been among the world’s strongest underweight positions in the years after the Brexit referendum, according to a Bank of America Corp.’s fund manager survey, surged on Friday after the election results. The FTSE 250 Index of mid-cap shares hit a record high.

Political clarity “may well lead to the U.K. no longer being ‘uninvestible’ and one would expect to see international investors close their underweights to the U.K. and Europe as risk appetite increases,” said Paul Flood, a multi-asset portfolio manager at BNY Mellon’s Newton Investment Management unit, which oversees about 50 billion pounds ($67 billion).

Credit Suisse Group AG, JPMorgan Chase & Co. and Morgan Stanley are among the brokers that recommended buying euro-area equities over the past few months, betting that the near-record valuation discount and the region’s macro recovery would lead them to beat U.S. peers.

And after President Donald Trump signed off on a phase-one trade deal with China, averting the Dec. 15 introduction of a new wave of U.S. tariffs, Christmas seemed to come early for some European stock traders.

“If trade headlines remain muted next year, Europe should outperform the U.S.,” said Ulrich Urbahn, head of multi-asset strategy and research at Joh Berenberg Gossler & Co.

Not all market participants agree. The prospect of Europe beating the U.S. next year is far-fetched because equity valuations aren’t as attractive as a year ago and the economic outlook has yet to improve, said Andrew Milligan, head of global strategy at Aberdeen Standard Investments.

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“Taking away a negative is not the same as creating a positive,” Milligan said by email. “Europe still faces an environment of weak growth and low inflation and there is considerable uncertainty about what the U.K.-EU trading relationship looks like post-Brexit.”

The European Central Bank President Christine Lagarde struck an optimistic note during her policy debut on Thursday by saying that the euro area’s economic slowdown is showing signs of bottoming out. Just like her predecessor, she called on governments to help spur growth with fiscal stimulus and structural reforms.

According to Goldman strategists led by Sharon Bell, the passage of Brexit and a pick-up in U.K. growth would have an important effect on the rest of Europe as the prolonged withdrawal has been a significant drag on euro-area growth. They raised their forecast on Friday for Stoxx Europe 600’s 12-month target by 4.8% to 440.

Investors will need to see “dynamism” in policy and a stronger economic recovery for the positioning in European equities to turn fully overweight, according to Chris Bailey, a European strategist at Raymond James.

“More immediately plausible are flows that take underweights back to neutral,” he said by email. “This easier catch-up is more than sufficient for the U.K. and Europe to outperform the U.S. in 2020.”

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