Christopher Johnson: Both Europe and the UK find themselves in the eye of the storm, facing tariff pressures as well as national security concerns. Yet how are investors adapting to this new world order? To discuss this and more, I am joined by Georgios Leontaris, the CIO of Switzerland and EMEA for HSBC Global Private Bank. So Georgios, my first question to you is referring back to what I said in the introduction of the new world order that we’re in. What opportunities are you seeing for clients in both the European and UK equity markets with all of the global turmoil that we’re experiencing at the moment?
Why Does HSBC Back European Bank Stocks?
Georgios Leontaris: Well, it is interesting because most of the questions that we had been receiving from our clients until recently were heavily skewed towards the US. However, we’ve seen that the performance turnaround has been quite impressive since the beginning of the year, and we’re starting to see more and more questions about opportunities within Europe. Taking a step back, it’s easy to understand why exposure to Europe and UK was light to begin with. Economic growth has been weak to say the least. Some of the core economies have been flirting with recession for quite a considerable amount of time.
We know that the attitude towards budget constraints has also been an obstacle. Regulation has also been a little bit tighter, and we also have external uncertainties, as you mentioned before, that are also weighing on sentiment. But at the same time, we also need to acknowledge that part of these concerns are not new and have been reflected in the price of European assets for some time. If we’re looking at valuations within Europe, we don’t necessarily see them as cheap to their own history, but if you compare European indices to the MSCI world or the S&P 500, for example, there is still an important gap that can be narrowed in the months and quarters to come. So with that improved performance that we’ve been seeing, we think that momentum can continue. Where do we see the biggest opportunities within Europe, not across the board?
Definitely, we have to have some sell activity. In fact, we see Europe more as a stock picker’s market. But if we start with sectors, I would highlight financials as being a little bit more interesting. We’ve seen that the earnings delivery has been strong. We’ve seen that banks are also concentrated on improving shareholder returns. In fact, if you see ROTE among the big European banks, you see that it’s actually quite comparable to the U.S. peers as well. The only difference is that you are trading at a lower price to book. So we think that this coupled with the fact that yields have also been a little bit stickier of late, the fact that credit curves have also steepened in the course of recent quarters, still offers the potential for earnings delivery from the big banks going forward.
How Will Trump’s Tariffs Effect European Stocks?
Johnson: And on US tariffs, and what do you think the impact will be of them on European and UK equity markets? And if the impact is bad, how are you hedging against this?
Leontaris: There’s a lot of uncertainty and questions when it comes to trade policy. We still don’t know the answer to many questions. What is going to be the scale, the scope of any potential changes in terms of trade policy? We don’t know the timing of the events, but also if there’s going to be any retaliation or room for compromise. I think if we take a step back, I think it’s natural to the tendency of people to look at singular effects, misses the point that the change, for example, in trade or any other policy, if you will, has other repercussions as well that can also have some offsetting characteristics. So for example, free-floating currencies might react or depreciate, for example, mitigating some price-related pressures. We also need to look at how companies stand in the light of changes in the external environment. So for example, if you look at the corporate world, companies were in the unfortunate position to deal with supply chain disruptions through COVID and beyond, but that also gave them the ability to navigate, to change their supply chains if and when needed in order to mitigate for certain changes. We also know that there’s also questions as to whether companies will absorb any price pressures and dent, for example, their margins or whether they will be able to pass on some of the costs towards the consumers. So there’s still many, many questions that are out there, but at the same time, I think what we need to look at is fundamentals and what is being priced in the market after all.
So as I mentioned previously, valuations are still at a discount towards the MSCI World. Positioning is certainly not stretched. It is showing some signs of recovery but we’re not at stretched levels. So momentum could continue in the short term. And ultimately, we also need to consider how companies stand in the face of any potential change. So for example, you have a lot of companies that are producing in the same countries where they are selling their product and that is not a tariff if you are producing for domestic consumption. So I think we do need to take a step back to look at the totality of factors that can have an influence on the potential earnings trajectory in terms of companies and what is also in the price. And I think if we do take that more sanguine approach and look at earnings, I think that there is still the ability to find some opportunities within the market.
Has DeepSeek Boosted Chinese Stocks?
Johnson: China technology stocks have been bolstered recently because of exuberance around DeepSeek AI. Do you think this is the beginning of a bull run for Chinese equities or do you see this faltering? Is it here temporarily?
Leontaris: We have recently upgraded our view on China stocks to a neutral positive. So I think that partly answers your question as to whether we expect the recent moves to extend or not. The answer is yes. Essentially, if we’re looking at the recent developments from DeepSeek, many were surprised by the emergence of a new technology that could challenge the cost structure of new technology. Certainly, a surprise was perhaps warranted, but I think it’s also a reminder that China is home to a number of competitive companies and industries that have a proven track record in both achieving technological advancements, but also in a cost-conscious manner. When it comes to AI and technology, we think that there is still further room to go. Look at valuations. For example, if you’re looking at the HSI index or the MSCI China, you’re still trading at forward PE multiples, which are around the 10 to 11 handle. That’s about half of what the S&P 500 is trading.
So, we think that there is still some room for the gap to be narrowed at current levels. When it comes to policy, we will look at the National Party Congress meeting in March for some additional clues, maybe not all of the answers, but certainly in terms of direction of travel. We believe that China is taking a more constructive stance towards the private sector, including the technology side. I think that the momentum that has already been shown can also trickle down, not just from the tech companies, but also to the broader enablers and adopters of AI. If we are starting to see the emergence of cheaper models, that basically means that the adoption rates also in China can also increase. Therefore, we also see opportunities not just in the big tech names and internet leaders in China, but also to other areas that can include smartphones, autonomous driving, humanoid robotics, for instance. There are many areas where we think that the positive spill over effects can continue. When it comes to China, we also have a barbell approach. We also favor a lot of the state-owned entities. High dividends also a factor. We think that the broader space within China can receive an uplift that is helped by the recent developments that we saw on the technology side.
Johnson: This is Christopher Johnson from Morningstar UK.
The author or authors do own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
