While everyone is focused on the U.S. markets’ incredible rally, peripheral European markets are under-priced and on the verge of a major rebound, writes Societe Generale analyst Paul Jackson. While most traders are skeptical of France, Jackson thinks that now is the perfect time to invest there, especially because a socialist government has recently been elected.

Now that the U.S. economy is recovering, and appears ready to absorb the effects of tapering, and China has avoided the much-feared hard landing, Europe is in a great position to finally recover from the global economic crisis. “European data flows have also improved and this enhances the likelihood that profits will grow,” says Jackson, “this will enable European equities deliver on the potential indicated by cyclically adjusted valuation ratios.”

Valuation of peripheral vs core countries

cyclically adjusted futures europe

Peripheral countries and France are cheaper than core countries (and the U.K.), but that situation won’t last once the Eurozone as a whole recovers. “We should witness a closing of these valuation gaps over the coming years,” says Jackson. But the periphery and the core won’t meet somewhere in the middle, because core nations like Germany are being valued correctly while other nations are being ignored by investors. According to Jackson, the valuation gap will close because the undervalued economies will grow.

France overtaking Germany for a change?

Jackson is particularly bullish on France, which he expects to outperform Germany in the coming years, and while the finance sector was largely annoyed when the center right lost power to the socialist party, historically that has been good news for investors.

“If we were buying economies, Germany would win based on the last ten years or so. However, there are signs of a reversal in that pattern and profit growth should be better in France,” says Jackson.  “Add to that the benefit of narrowing bond yield spreads, cheaper valuations and the traditional fillip offered by a Socialist administration and the choice is easy: France should be preferred.”

france

This discrepancy between core and peripheral European equities comes just as value investors are starting to warn that the U.S. market is heavily overbought, China continues to fall, and skepticism of emerging market opportunities is growing, making the possibility of undervalued European equities that much more interesting.