(UBS)
As Europe navigates a complex economic and geopolitical landscape, we see select single-stock opportunities emerging against the backdrop of the following key catalysts: (1) a likely more pro-growth German government, (2) a potential Russia/Ukraine ceasefire or peace deal, (3) an improving outlook for manufacturing activity, and (4) evolving trade tariff discussions between the US and the EU.
We have identified six key drivers that form our “ Six ways to invest in Europe” investment theme, identifying sectors and companies best positioned for this environment:
1: Cyclical economic recovery ahead in Europe,
2: Post-election beneficiaries in Germany,
3: Rising security investments (defense and cyber),
4: Rebuilding Ukraine and recovery in Eastern Europe,
5: Beneficiaries of lower energy costs in Europe,
6: Globally active European companies with limited global trade risks
We estimate exposures of all equities in the MSCI Europe based on systematic measures and discretionary assessments versus our stock selection's exposure. Our analysis shows that our stock selection enjoys higher exposure to the respective six sub-themes compared to the broader European market.
While uncertainties persist—ranging from geopolitical risks to prolonged coalition negotiations in Germany—a targeted approach focusing on companies aligned with our key drivers can present attractive investment opportunities, in our view. While investors can opt to pick single stocks related to selective drivers mentioned in this report, we recommend investing in a diversified way for a risk-return optimized portfolio return.
We see the EMU industrial sector as attractive. Relative valuations are appealing, and the sector offers structural growth exposure to our power and resources theme, while it benefits from the reshoring of manufacturing trend and materially higher European defense equipment spending. We also see attractive value Eurozone small- and mid-caps, and believe that supportive inflections are starting to emerge in the macroeconomic backdrop.
