Despite sticky inflationary pressures, Barclays analysts think European equities offer noteworthy “cheap upside optionality” on fueling global growth prospects, they said in a Wednesday note.
Given the ongoing dominance of the US market, Europe might find it difficult to outperform the AI and Tech-dominated S&P 500, with geopolitical concerns introducing additional unpredictability.
However, the analysts still believe “the region offers improving tactical risk-reward given its value/cyclical tilt and our expectation of a pick-up in domestic activity into H2.”
China’s impact on Europe-based equities is significant, and while substantial stimulus remains uncertain, the recent market trends suggest what could be seen as capitulation, indicating that the tactical risk-reward might be more favorable than perceived.
Even in a risk-on market environment, there is a notable spread between the performance of cyclical sectors, with clear distinctions between winners and losers, Barclays noted.
As such, Europe offers upside opportunities. After recently elevating Luxury Goods to Overweight, the analysts are now enhancing their focus on cyclical and consumer sectors by ending their Underweight position on Automobiles and shifting Utilities to an Underweight status.
“While momentum behind Tech and Cap Goods is very strong, the space looks tactically stretched. We see better near-term risk-reward in beaten-down value-cyclicals like Energy/Materials, and keep Banks as our top OW,” analysts noted.