Deeper capital markets
We also think Europe must deepen its capital markets to help lower the cost of capital. Progress can also be made on the Savings and Investment Union, which aims to make Europe a more attractive destination to invest and channel more European household savings into productive investments. European households keep about a third of financial assets in cash and deposits, twice that of the U.S., per Eurostat and Federal Reserve data. The key is turning savers into investors to help develop capital markets, in our view. That could create a positive feedback loop – greater wealth could spur stronger consumer spending and thus boost growth. Stronger growth could help reduce Europe’s valuation discount versus the U.S.
We focus on selective opportunities in Europe. Our preference for financials, utilities and industrials has played out this year; these are Europe’s best-performing sectors this year. Yet more attractive valuations lead us to switch from industrials to the healthcare sector, which benefits from strong cash flows and AI adoption. Longer-term, we still see stepped-up NATO spending commitments supporting defense and industrials. On AI, the U.S. leads on AI buildout, but Europe could take a lead on AI adoption, driving efficiency gains in sectors like manufacturing that comprise a larger share of its economy.
Our bottom line
We are neutral European stocks but see many selective opportunities. We don’t think Europe needs total success on every front to turn a page, just a dedication to pushing forward reforms and not just in crisis moments.
Market backdrop
The S&P 500 fell 2% last week on renewed concerns about the AI theme and valuations, even after Nvidia’s earnings beat expectations. We don’t think rising AI-related debt issuance is a concern. The delayed U.S. jobs report for September, while beating expectations, supports our view that the labor market is cooling and can allow the Federal Reserve to trim policy rates more. U.S. 10-year Treasury yields dipped but stayed in a rough range between 4.00-4.20% in recent months.
Delayed U.S. economic data is starting to trickle out – but next week will still be quiet around the U.S. Thanksgiving holiday. The Bureau of Labor Statistics said it would release both the October and November jobs report on Dec. 16 – after the next Fed meeting. The October report will only feature the establishment survey used for payrolls data. The November jobs report will be noisy due to government layoffs from earlier this year that were deferred.
