LONDON Rich valuations would likely limit the extent of any relief rally in European stocks even if hard-right French presidential candidate Marine Le Pen loses, Deutsche Bank said in a note.
Jitters have spread through markets ahead of the French election in May, with a Le Pen victory seen as posing the greatest political risk due to her anti-European Union stance and risks of a breakdown of the eurozone.
But what Deutsche Bank calls a 'benign' scenario, in which a candidate seen as more market-friendly takes the presidency, would have limited positive effects for equities, strategists at the bank said.
European stock market valuations are near 15-month highs, at 15 times forward price to earnings, and almost 5 percent above what Deutsche calls fair value, leaving little room for more gains.
An avoidance of what markets see as the worst-case scenario would likely lead to an appreciating euro and rising real bond yields to rise, both broadly negative for equities.
Deutsche Bank economists project Le Pen has a 25 percent chance of winning the election - below the 30 percent probability assigned by betting markets.
Strategists at the bank were also skeptical of the view that a Le Pen win could spark an equities rally similar to the ones seen after the Brexit vote and Donald Trump's win in the U.S. Presidential election.
"The main reason markets digested the 2016 political shocks well was that they coincided with a sharp acceleration in global growth momentum, protecting asset prices from rising political uncertainty," analysts said.
With global macroeconomic surprises already at a seven-year high, there is little scope for more gains, analysts said.
Instead, Deutsche expects a Le Pen victory could cause European equities to fall around 15 percent, a level similar to the average correction during the euro crisis in 2010 to 2012.
(Reporting by Helen Reid, Editing by Vikram Subhedar)