Speaker 1: Bloomberg Audio Studios, podcasts, radio news. European earnings are starting
Speaker 1: to flow in as global markets are being dominated by
Speaker 1: the swings in the AI trade and the uncertainty created
Speaker 1: by the Iran war. Let's discuss now, Bata Mantheus, head
Speaker 1: of European Equity strategy at City be At A good morning.
Speaker 1: Good to have you back with us on the AI story.
Speaker 1: How do you see that playing out in earning season
Speaker 1: in Europe? Are there consequences evident beyond those few tech
Speaker 1: names that are based here.
Speaker 2: Absolutely so. European equity market doesn't have that much exposure
Speaker 2: via tech to AI story.
Speaker 3: This is why.
Speaker 2: Actually in the past few weeks when AI warries have
Speaker 2: been playing out through the market, it has outperformed, right,
Speaker 2: But it does have links to this broader buildout of
Speaker 2: AI via basic resources. So you can see these stocks
Speaker 2: being under pressure or broader industrial base as well.
Speaker 3: Right. So this is.
Speaker 2: Something to bear in mind now from our perspective, given
Speaker 2: the market has done so well. Most of the markets
Speaker 2: are hitting all time highs despite all the worries and
Speaker 2: problems we've had in the first half. Markets are up
Speaker 2: ten percent globally. Some posts was due, right, and now
Speaker 2: we have to stop back, and this is where the
Speaker 2: reporting season comes handy, to stop back, step back and
Speaker 2: think what is what are the next six months or
Speaker 2: the second half of the year is going to look like.
Speaker 2: And of course our eyes have to be on earnings
Speaker 2: and on the reporting season.
Speaker 3: Now, what I have to say on Europe, I am.
Speaker 2: Really encouraged by what we are seeing in the earnings
Speaker 2: revision trends, so the direction of the analyst forecasts and
Speaker 2: to some it's not very intuitive, and it's actually happening
Speaker 2: on many fronts. So there are three dimensions of surprises
Speaker 2: in terms of positivity of it. Number one is the
Speaker 2: size actually earnings revisions in Europe this week have hit
Speaker 2: almost all time highs. Handful of times it's been higher.
Speaker 2: So perhaps from this level it's hard to be as
Speaker 2: it is a very high level, it's hard to see
Speaker 2: them improving. But when I look underneath the surface, we
Speaker 2: have the second dimension breath of these earnings revisions. Eighty
Speaker 2: percent of sectors on level two out of twenty four
Speaker 2: sectors in Europe are seeing upgrades, and very similar story
Speaker 2: is happening in the broader set of sectors in other
Speaker 2: regions around the world. So this type of broadening tends
Speaker 2: to be very conducive or a lead on cyclical outperformance.
Speaker 2: And the third one really very important, the last dimension timing.
Speaker 2: All these upgrades are happening against negative seasonality trends. When
Speaker 2: that happens, historically it's been a good lead on upgrades
Speaker 2: continue over three to six months. So actually with ninety
Speaker 2: percent hit ratio, ten percent of the time it didn't happen,
Speaker 2: but ninety percent of the time upgrades continued.
Speaker 4: So that's quite encouraging. Okay, so you're encouraged on Europe.
Speaker 4: You're thinking about AI and the volatility and also the
Speaker 4: huge stot of volumes that we've seen in terms of
Speaker 4: that trade. Look, I wonder what more needs to happen though,
Speaker 4: actually to attract that global investor into European businesses. If
Speaker 4: you'd say that the outlook is so bright, I mean,
Speaker 4: I was reading just this morning about takaig over in Japan.
Speaker 4: This does seem to be taking shape, this idea of
Speaker 4: investing more into domestic assets. I mean, is this kind
Speaker 4: of you know, something that we've talked about a lot
Speaker 4: for Europe, for the UK, do you think there'll be
Speaker 4: any similar policy? You know, to come in that sense,
Speaker 4: you know, to try to drive that more positive story
Speaker 4: in Europe.
Speaker 2: Absolutely, so it is a constructive view on Europe, but
Speaker 2: it's a constructive view on global cyclicals well. So Japan,
Speaker 2: for US is actually an overweight continental Europe is a neutral.
Speaker 2: So we see some sectors having headwinds, like exporters to China,
Speaker 2: while others like banks for example, are seeing very very
Speaker 2: good upsides. So have to be selective, but a large
Speaker 2: set of sectors is doing well and could continue to
Speaker 2: do well. My eyes are on the European next seven
Speaker 2: year budget, so that's a longer term story. It's being
Speaker 2: negotiated this year, is going to be approved next year.
Speaker 2: So are we going to see any regulatory changes in
Speaker 2: this respect or perhaps we've been speaking about that in
Speaker 2: the past by European right, So will the government have
Speaker 2: some levels that they will need to buy from the
Speaker 2: European companies which would be very positive as well. So
Speaker 2: this fiscal and these type of regulatory changes, it's happening slowly,
Speaker 2: but it's happening. It's still a tailwind.
Speaker 3: On the European budget.
Speaker 1: I do wonder what I suppose would be the most
Speaker 1: positive for markets, because I mean you're talking about the
Speaker 1: fight currently being over things like allocation between what goes
Speaker 1: to farming, what goes to other regional funding as well,
Speaker 1: and what could be extracted for competitiveness funding as well.
Speaker 1: I mean, what elements of the budget negotiations are you
Speaker 1: watching most closely.
Speaker 2: Yeah, So it's going to be quite a volatile ride
Speaker 2: because of course every country has different priorities, but for me,
Speaker 2: this by European and a drive for Europe to be
Speaker 2: more independent from any perspective, whether it's energy security, whether
Speaker 2: it's national security, supply chain security, AI security, These are
Speaker 2: all things that we are looking out for and we'll
Speaker 2: hear about them for sure.
Speaker 3: The question is what the outcome is going to be.
Speaker 4: Yeah, in terms of what you're expecting for the rest
Speaker 4: of the earning season, you say it's quite it is
Speaker 4: very positive. I mean Barbary not so great this morning.
Speaker 4: What are the individual stocks that you pick out in
Speaker 4: terms of the reaction to the ones that we've already
Speaker 4: had in Europe.
Speaker 2: So when it comes to luxury goods, as I've mentioned,
Speaker 2: we are still quite cautious on sectors or companies that
Speaker 2: have big exposure from China to China, right, So, autos
Speaker 2: still an underweight. Luxury goods consumer products where luxury goods
Speaker 2: are is still an underweight for us. However, you know
Speaker 2: there are some companies you are seeing some signs of
Speaker 2: improvement in in selective names, right, So that's something we
Speaker 2: are watching very close. And of course that's the sector
Speaker 2: that has been seeing downgrades for the last two three years.
Speaker 3: So it will end eventually. The questions is it now