Citi Downgrades Europe Stocks on Political Turmoil, Upgrades U.S. – BNN Bloomberg
Recent political developments in France have compelled Citigroup Inc. to revise its outlook on the equity markets, favoring U.S. stocks over European ones. Amid growing political uncertainties and a narrowing market that could potentially see further unwinding, Citi’s strategists, under the leadership of Beata Manthey, have shifted their stance on European shares to neutral from overweight.
Contrastingly, the strategists upgraded U.S. equities to overweight from neutral, pinpointing technology and industrial shares as areas of focus. The adjustment stems from the U.S.’s significantly higher growth orientation in comparison to Europe, paired with a more robust defensive stance amidst times of uncertainty.
The decision comes in the wake of unexpected political events in France that triggered market tumult, notably after President Emmanuel Macron announced a snap election. This announcement led to a dramatic decline that erased approximately US$258 billion from the market capitalization of French companies, alongside a selloff of the nation’s sovereign bonds amidst concerns over the worsening financial stability of the country.
Apprehensions regarding the potential loss of further ground by Macron’s centrist, pro-business Renaissance party in the upcoming two-round vote scheduled for June 30 and July 7 have caused investors to retract. The prospect of a far-right majority within the French parliament introduces a profound level of uncertainty, challenging the prospects of fiscal consolidation, funding for Ukraine, and policies regarding European industries, according to Citigroup strategists.
This stance towards European markets saw a sharp manifestation last week with a 2.4 percent downturn, a significant underperformance compared to their U.S. counterparts. This shift in outlook occurs just a week subsequent to Citi’s previous forecast, which projected the pan-European Stoxx Europe 600 Index might ascend 14 percent to reach a new record by mid-2025.
Nonetheless, the French market displayed early signs of stabilization at the beginning of this week following far-right leader Marine Le Pen’s commitment to collaborate with Macron should she emerge victorious in the elections.
Looking beyond Europe, optimism surrounding U.S. equities appears to be growing. Goldman Sachs strategists recently elevated their year-end target for the S&P 500 Index for the third time, buoyed by Wall Street’s positive earnings growth outlook and a strong U.S. economy. In alignment, Evercore ISI strategists forecast an additional double-digit rally through to the end of 2024, with the S&P 500 Index anticipated to set new records. Additionally, RBC Capital Markets strategists have noted that U.S. equities might capture safe-haven flows, especially if investments into European equity funds are compromised due to the existing political volatility.
Given these evolving dynamics, investors are watching the geopolitical landscape closely, evaluating the potential impact of political decisions and their repercussions on market performance across both continents.
