European stocks shrug off political risk

With all the fuss about elections in the Netherlands and France potentially sinking the eurozone and the EU, you'd think investors would be running a mile from European stocks. Yet in the week to 22 February, European equity funds attracted the biggest weekly inflows for more than a year. The pan-European FTSE Eurofirst 300 index has climbed to a two-year high, building on a rally that began late last year.

No wonder, reckons Jeff Taylor of Invesco Perpetual. It's tempting to assume that the electoral upsets seen in the English-speaking world will automatically spread to the continent, he told The Times. But in Europe, "the evidence that an unstoppable tide of radical politics will sweep away all previous political certainties is somewhat patchy". Radical parties were defeated in Spain and Austria last year, for instance, and a Le Pen victory in the second round is still unlikely.

It's also worth remembering that, even if the populists do win, they can't just click their fingers and dissolve the European integration project. In the Netherlands, a referendum on EU membership requires a change in the constitution, which in turn necessitates a two-thirds majority in parliament. The populist, anti-immigrant Party for Freedom is currently the largest party in the polls, but will have no partners in the legislature, since the other parties have ruled out working with it. Similarly, in France Marine le Pen will struggle to muster the parliamentary majority needed to secure a plebiscite and impose legislation. The German anti-immigrant and anti-euro grouping AfD will almost certainly enter the federal parliament in this autumn's elections, but is unlikely to have much influence. There are "significant political barriers against further referenda in the core European countries", concludes Barclays.

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In the meantime, the post-crisis cyclical upturn has finally gathered some steam. Unemployment has continued to fall; business activity surveys have hit six-year highs; and in January inflation climbed across all member states for the first time in four years. So the spectre of a deflationary slump has receded.

The eurozone is also far more exposed to global trade than the US or Japan, so the fact that global growth estimates have been upgraded of late bodes well for the earnings of the continent's multinational blue chips. Both earnings and stock prices have lagged behind the US in recent years, and have lots of catching up to do; valuations are also far more reasonable. Given all this, you can see why investors appear to have decided that the risk-reward outlook for Europe is actually fairly appealing.