Why UBS is telling investors to forget Europe's 'tired caricature' and buy its stocks

By Steve Goldstein

European shares are underowned by global investors. UBS says that is a buying signal.

Europe is increasingly a play on trends like electrification, argue UBS strategists.

U.S. Treasury Secretary Scott Bessent made waves overnight with his comments on foreign-exchange-market intervention, but he also was asked about what Europe was doing in artificial intelligence. "Nothing," was his succinct if undiplomatic response. "The French 'rien,' the Spanish 'nada.' "

He compared the French AI company Mistral's raising about $3 billion at a $30 billion valuation to the likely $1 trillion to $2 trillion valuations for OpenAI and Anthropic when they list.

The Treasury secretary's comments are a useful framing for an unusually bullish call on Europe from UBS strategists. "Forget the tired caricature of Europe as a low-growth value trap," said strategists led by Gerry Fowler. Today, European stocks are a higher-quality, better-capitalized version than before the 2008 global financial crisis, with partial exposure to the AI and data-center supercycle, accelerating fiscal spending and global orientation, they declare.

European banks XX:SX7E have more than doubled in value over the last two years - U.S. banks are up just over 30% over the same timeframe - and the UBS team says the firms are lending into an early, structural, capital-expenditure-driven re-leverage cycle. Industrials like Siemens (XE:SIE), Schneider Electric (FR:SU) and Rolls-Royce (UK:RR) give investors electrification, automation, grids, aerospace and defense, the strategists say, while AI exposure comes from companies such as ASML (ASML), along with Schneider Electric, Siemens and Siemens Energy (XE:SIE).

Accelerating fiscal spending is now evident in the purchasing managers' indexes, and there's healthcare innovation, too, Novartis's (CH:NOVN) pipeline disasters over the last week notwithstanding.

The strategists point out that European companies can outgrow their languid home gross domestic products. Part of that is the geographical diversification of their revenue streams - 50% outside of Europe overall and 65% among the top 20 stocks - but it's also because of the pricing power in supply-constrained sectors. "Increasingly, Europe's champions are price-setters," they say, pointing to examples including ASML, Schneider, Airbus (FR:AIR), Safran (FR:SAF), Siemens Energy and Prysmian (IT:PRY).

Another point in Europe's favor is that international investors view the region much as Bessent does - with indifference if not disdain. "Our crowding data points to no meaningful build-up of positioning in Europe since interest faded in March - indeed European crowding has faded sharply and now sits close to neutral - in stark contrast to the U.S., where aggregate positioning remains close to a record high," the strategists say.

On a sector basis, only semiconductors are meaningfully owned, mostly as a consequence of ASML, while investors are shunning automobile makers. "There is very little crowding risk embedded in the current sector leadership, and little dry powder being unwound against it," they say.

While investors may not consciously try to boost their European exposure, passive inflows into non-U.S. equities have returned, mostly through international allocations. Europe gets roughly 55% of those flows. "ETF buying as a share of market cap, having fallen well behind the U.S., now looks to be recovering. Active flows remain more modest, but the direction of travel on the passive side is the more meaningful early signal that under-owned Europe can attract capital as the earnings and regime story plays out," they say.

What's the risk? Interest rates. UBS analyzes stock-market valuations versus the combined 10-year Treasury BX:TMUBMUSD10Y and European high-yield credit spreads. "The relationship is a particularly tight one for European equities: over the last few years the discount rate proxy has been the single biggest driver of the [Stoxx 600 (FXXP00)] forward P/E, and the recent move up in yields argues, all else equal, for a lower multiple," they say. "But all else is not equal. A genuine growth acceleration deserves a compressing equity risk premium, and as the earnings cycle reasserts itself we think that dynamic can more than offset the discount-rate drag."

The markets

A small downward drift in U.S. stock futures (ES00) (NQ00) was underway early Wednesday as the Brent crude contract (BRN00) topped the $100 mark.

 
Key asset performance                                                Last       5d      1m      YTD     1y 
S&P 500                                                              7673.52    -0.16%  -1.03%  12.10%  18.14% 
Nasdaq Composite                                                     26,421.41  0.19%   -0.69%  13.68%  21.21% 
10-year Treasury                                                     4.813      2.90    11.20   64.10   76.00 
Gold                                                                 4438.9     0.10%   -0.67%  2.46%   20.61% 
Oil                                                                  95.09      4.92%   15.15%  65.63%  49.16% 
Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

The Treasury is due at some point - Bloomberg News suggests 11 a.m. Eastern time - to announce the size of Thursday's debt-buyback operation. The Treasury also will auction $39 billion in 10-year notes on Wednesday.

The U.S. destroyed Iranian crude carriers, and Iran responded by attacking a U.S. base in Jordan in the latest violence gripping the region.

Apple (AAPL) is believed to be set to roll out a foldable iPhone at a 1 p.m. event.

GameStop (GME) late Tuesday boosted its outlook for adjusted earnings before interest, tax, depreciation and amortization after reporting declining sales but improving profits.

Meta Platforms' stock (META) rose a day after the launch of an AI agent called Muse.

How Greece is wooing hedge funds.

The chart

Labor-market economist Guy Berger took a look at employment data that showed women are accounting for virtually all of the jobs growth. There's a big gap in how the household survey (best known for its use in calculating the unemployment rate) and the establishment survey (known for its use in calculating payrolls) count female versus male employment. The gap is due to the once-a-year updates to U.S. Census population data, says Berger.

Top tickers

Here were the most active stock-market ticker symbols as of 5 a.m. Eastern.

 
Ticker symbol  Security name 
NVDA           Nvidia 
SPCX           SpaceX 
MU             Micron Technology 
INFY           Infosys 
GME            GameStop 
AMD            Advanced Micro Devices 
AAPL           Apple 
TSM            Taiwan Semiconductor Manufacturing Co. 
INTC           Intel 
MSFT           Microsoft 

Cockroach milk was one of the winners of the annual Ig Nobel competition for unusual scientific studies.

-Steve Goldstein

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09-09-26 0855ET