WEBVTT - Citi's Manthey Talks EU Budget Negotiations

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news. European earnings are starting

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<v Speaker 1>to flow in as global markets are being dominated by

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<v Speaker 1>the swings in the AI trade and the uncertainty created

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<v Speaker 1>by the Iran war. Let's discuss now, Bata Mantheus, head

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<v Speaker 1>of European Equity strategy at City be At A good morning.

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<v Speaker 1>Good to have you back with us on the AI story.

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<v Speaker 1>How do you see that playing out in earning season

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<v Speaker 1>in Europe? Are there consequences evident beyond those few tech

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<v Speaker 1>names that are based here.

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<v Speaker 2>Absolutely so. European equity market doesn't have that much exposure

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<v Speaker 2>via tech to AI story.

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<v Speaker 3>This is why.

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<v Speaker 2>Actually in the past few weeks when AI warries have

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<v Speaker 2>been playing out through the market, it has outperformed, right,

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<v Speaker 2>But it does have links to this broader buildout of

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<v Speaker 2>AI via basic resources. So you can see these stocks

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<v Speaker 2>being under pressure or broader industrial base as well.

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<v Speaker 3>Right. So this is.

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<v Speaker 2>Something to bear in mind now from our perspective, given

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<v Speaker 2>the market has done so well. Most of the markets

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<v Speaker 2>are hitting all time highs despite all the worries and

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<v Speaker 2>problems we've had in the first half. Markets are up

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<v Speaker 2>ten percent globally. Some posts was due, right, and now

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<v Speaker 2>we have to stop back, and this is where the

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<v Speaker 2>reporting season comes handy, to stop back, step back and

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<v Speaker 2>think what is what are the next six months or

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<v Speaker 2>the second half of the year is going to look like.

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<v Speaker 2>And of course our eyes have to be on earnings

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<v Speaker 2>and on the reporting season.

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<v Speaker 3>Now, what I have to say on Europe, I am.

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<v Speaker 2>Really encouraged by what we are seeing in the earnings

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<v Speaker 2>revision trends, so the direction of the analyst forecasts and

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<v Speaker 2>to some it's not very intuitive, and it's actually happening

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<v Speaker 2>on many fronts. So there are three dimensions of surprises

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<v Speaker 2>in terms of positivity of it. Number one is the

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<v Speaker 2>size actually earnings revisions in Europe this week have hit

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<v Speaker 2>almost all time highs. Handful of times it's been higher.

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<v Speaker 2>So perhaps from this level it's hard to be as

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<v Speaker 2>it is a very high level, it's hard to see

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<v Speaker 2>them improving. But when I look underneath the surface, we

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<v Speaker 2>have the second dimension breath of these earnings revisions. Eighty

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<v Speaker 2>percent of sectors on level two out of twenty four

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<v Speaker 2>sectors in Europe are seeing upgrades, and very similar story

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<v Speaker 2>is happening in the broader set of sectors in other

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<v Speaker 2>regions around the world. So this type of broadening tends

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<v Speaker 2>to be very conducive or a lead on cyclical outperformance.

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<v Speaker 2>And the third one really very important, the last dimension timing.

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<v Speaker 2>All these upgrades are happening against negative seasonality trends. When

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<v Speaker 2>that happens, historically it's been a good lead on upgrades

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<v Speaker 2>continue over three to six months. So actually with ninety

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<v Speaker 2>percent hit ratio, ten percent of the time it didn't happen,

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<v Speaker 2>but ninety percent of the time upgrades continued.

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<v Speaker 4>So that's quite encouraging. Okay, so you're encouraged on Europe.

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<v Speaker 4>You're thinking about AI and the volatility and also the

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<v Speaker 4>huge stot of volumes that we've seen in terms of

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<v Speaker 4>that trade. Look, I wonder what more needs to happen though,

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<v Speaker 4>actually to attract that global investor into European businesses. If

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<v Speaker 4>you'd say that the outlook is so bright, I mean,

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<v Speaker 4>I was reading just this morning about takaig over in Japan.

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<v Speaker 4>This does seem to be taking shape, this idea of

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<v Speaker 4>investing more into domestic assets. I mean, is this kind

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<v Speaker 4>of you know, something that we've talked about a lot

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<v Speaker 4>for Europe, for the UK, do you think there'll be

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<v Speaker 4>any similar policy? You know, to come in that sense,

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<v Speaker 4>you know, to try to drive that more positive story

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<v Speaker 4>in Europe.

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<v Speaker 2>Absolutely, so it is a constructive view on Europe, but

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<v Speaker 2>it's a constructive view on global cyclicals well. So Japan,

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<v Speaker 2>for US is actually an overweight continental Europe is a neutral.

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<v Speaker 2>So we see some sectors having headwinds, like exporters to China,

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<v Speaker 2>while others like banks for example, are seeing very very

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<v Speaker 2>good upsides. So have to be selective, but a large

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<v Speaker 2>set of sectors is doing well and could continue to

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<v Speaker 2>do well. My eyes are on the European next seven

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<v Speaker 2>year budget, so that's a longer term story. It's being

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<v Speaker 2>negotiated this year, is going to be approved next year.

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<v Speaker 2>So are we going to see any regulatory changes in

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<v Speaker 2>this respect or perhaps we've been speaking about that in

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<v Speaker 2>the past by European right, So will the government have

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<v Speaker 2>some levels that they will need to buy from the

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<v Speaker 2>European companies which would be very positive as well. So

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<v Speaker 2>this fiscal and these type of regulatory changes, it's happening slowly,

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<v Speaker 2>but it's happening. It's still a tailwind.

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<v Speaker 3>On the European budget.

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<v Speaker 1>I do wonder what I suppose would be the most

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<v Speaker 1>positive for markets, because I mean you're talking about the

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<v Speaker 1>fight currently being over things like allocation between what goes

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<v Speaker 1>to farming, what goes to other regional funding as well,

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<v Speaker 1>and what could be extracted for competitiveness funding as well.

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<v Speaker 1>I mean, what elements of the budget negotiations are you

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<v Speaker 1>watching most closely.

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<v Speaker 2>Yeah, So it's going to be quite a volatile ride

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<v Speaker 2>because of course every country has different priorities, but for me,

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<v Speaker 2>this by European and a drive for Europe to be

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<v Speaker 2>more independent from any perspective, whether it's energy security, whether

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<v Speaker 2>it's national security, supply chain security, AI security, These are

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<v Speaker 2>all things that we are looking out for and we'll

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<v Speaker 2>hear about them for sure.

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<v Speaker 3>The question is what the outcome is going to be.

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<v Speaker 4>Yeah, in terms of what you're expecting for the rest

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<v Speaker 4>of the earning season, you say it's quite it is

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<v Speaker 4>very positive. I mean Barbary not so great this morning.

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<v Speaker 4>What are the individual stocks that you pick out in

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<v Speaker 4>terms of the reaction to the ones that we've already

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<v Speaker 4>had in Europe.

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<v Speaker 2>So when it comes to luxury goods, as I've mentioned,

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<v Speaker 2>we are still quite cautious on sectors or companies that

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<v Speaker 2>have big exposure from China to China, right, So, autos

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<v Speaker 2>still an underweight. Luxury goods consumer products where luxury goods

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<v Speaker 2>are is still an underweight for us. However, you know

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<v Speaker 2>there are some companies you are seeing some signs of

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<v Speaker 2>improvement in in selective names, right, So that's something we

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<v Speaker 2>are watching very close. And of course that's the sector

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<v Speaker 2>that has been seeing downgrades for the last two three years.

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<v Speaker 3>So it will end eventually. The questions is it now