MANAGEMENT-European elections will be favorable to the bloc’s actions – Oddo BHF

MANAGEMENT-European elections will be favorable to the bloc’s actions – Oddo BHF
MANAGEMENT-European elections will be favorable to the bloc’s actions – Oddo BHF

PARIS, May 29 (Reuters) – The elections of deputies to the European Parliament should help to give new impetus to European actions, while certain sectors will benefit from the measures taken by the current legislature, according to Oddo BHF, which has published on Wednesday its positions on the ballot which will take place from June 6 to 9.

The central scenario retained by the chief economist of Oddo BHF, Bruno Cavalier, is that of a renewal of Ursula von der Leyen at the head of the European Commission, suggesting continuity in European decisions.

The number of seats of the three parties forming the current coalition (liberals from Renew, social democrats from the S&D and conservatives from the EPP) should increase from 419 out of 705 to 407 out of 720, a comfortable majority which could nevertheless be divided at the occasion of certain votes, according to the “Europe Elects” site cited by Oddo BHF.

As for the far-right parties, which should strongly strengthen their presence in the European Parliament, Bruno Cavalier emphasizes that their positioning is no longer comparable to that of 2014, because there is no longer any question of leaving the European Union (EU ): the political risk is therefore lower.

In this context, the asset manager recommends in the short term switching to European equities from June 10, after having so far favored American equities.

“The performance gap between the two zones has reached a low and is starting to reverse,” notes Thomas Zlowodzki, head of equity strategy at Oddo BHF.

The Ebitda margin differential increased by 59 basis points in the first quarter of 2024 alone between S&P 500 and Stoxx 600 companies, reaching almost 300 basis points, according to Datastream figures cited by Oddo BHF . The valuation discount for European stocks compared to their American counterparts reached 35% at the end of May, compared to a historical average of 18% and a low of 38%, reached in February.

“The relief that will follow the European elections and the prospect of elections in the United States could be favorable for European stocks,” explains Thomas Zlowodzki, referring to the American presidential election scheduled for November.

The rebound in the euro zone economy and the drop in rates from the European Central Bank (ECB), which occur in parallel with the slowdown in American activity, will also support European equity indices, judges the management group.

Some volatility will likely be seen ahead of the elections, as investors fear that the rise of right-wing parties poses a risk. Furthermore, the still solid arguments for American equities – importance of the technology sector, less exposure to China, energy independence and a strong dollar – justify, in the long term, not neglecting American securities, underlines Oddo BHF.

WINNERS AND LOSERS

Three sectors should continue to perform well, whatever the outcome of the elections, thanks to favorable underlying trends.

Semiconductors, first of all, whose importance is recognized by all political parties and which will benefit from the deployment of the “European Chip Act”, which commits 43 billion euros in public and private financial support according to figures of the Commission cited by Oddo BHF.

Defense, then, the budget devoted to it by the EU being around thirty percent lower than that of the United States, which leaves significant room for progress despite high valuations. Thomas Zlowodzki also notes that “market practices are changing, with German investors starting to buy securities in the sector” since the invasion of Ukraine.

Finally, the securities of utility groups linked to electricity networks should continue to be supported by the theme of energy security, believes Thomas Zlowodzki.

Conversely, skepticism around electric cars will weigh on the automobile sector, also faced with American and Chinese competition. European competitiveness should remain permanently degraded, apart from “strong mobilization and increased cooperation” of Member States, “very hypothetical at this stage”, explains Oddo.

The European aeronautical sector will continue to struggle against headwinds, in particular decarbonization requirements and excessive fragmentation – 80% of traffic is carried by 28 airlines, compared to only 7 in the United States. A relaxation of the European Commission’s anti-competitive rules would make it possible to compensate for this market breakdown, but such a change remains uncertain, concludes Oddo BHF. (Written by Corentin Chappron, edited by Blandine Hénault)

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