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Analysts at Citi Research downgraded European stocks from overweight to neutral and upgraded growth in U.S. stocks, according to a report from Global Equity Strategy.
European stocks are increasingly risky in the short term as markets tighten and there is political uncertainty ahead. region, analyst Beata M. Manthey wrote in the report.
The Euro Stoxx 50 (NYSERCA:FEZ) is up more than 6% so far this year and about 10% from a year ago, but has been under pressure in recent days: it is down 4.64% from the last five days.
However, analysts remain constructive in the medium term due to early cycle macro dynamics in the region and inflecting fundamentals, they said.
They list three reasons for the degradation:
1. Greater political risk:
“The prospects of a far-right majority in the French parliament have introduced considerable uncertainty, raising questions around fiscal consolidation, financing for Ukraine and European industrial policy,” Manthey wrote.
Additionally, the OAT-Bund yield spread rose to 79 basis points on Monday, the highest since 2017, and the spread widened by around 30 basis points last week, after French President Emmanuel Macron called an election.
French stocks (EWQ), (CAC:IND) tend to be very volatile around elections. The French banking sector is also experiencing a 20% loss since mid-May.
2. Increasingly narrower markets:
Both US (SP500) and European (FEZ) stocks narrowed early in the year, with gains concentrated around mega-cap growth stocks (around February and April the market lead began to widen), but once again they have begun to narrow. with a growth higher than the value. This was more common in the US.
But now European stocks are following in the US's footsteps: “Narrow leadership is evident in the performance of the sector, with only technology and healthcare having contributed significantly to the performance of the MSCI Europe (IEUR) over the last month “Manthey wrote.
3. Positioning:
Positioning in Europe (FEZ) and European banks (OTC:DJXSF) was already on edge, but is now in line with the S&P 500 (SP500), “although investors are longer on the Nasdaq (COMP:IND)” .
As for banks (OTC:DJXSF), they have been “hovering long highs” early in the year, the analysts said, and “the last time we saw banks break down from similarly extended highs was around (the Bank of Silicon Valley crisis) in March 2023,” Manthey said. “Back then, the normalized positioning fell from +5 to around -2 before recovering. This suggests to us that the relaxation of positioning could go further.”
