Market: These projects that Europe must succeed in to catch up with the United States on the stock market

(BFM Bourse) – In a recent note, the bank UBS compiled an important series of challenges that the European Union must meet to prevent the United States from taking off on the stock market. The upside potential is significant, assures the establishment.

Alarm signals are multiplying for Europe. In September, the report by the former president of the European Central Bank (ECB), Mario Draghi, had already warned of the urgency of reviving growth in the Old Continent, whose competitiveness is declining compared to the United States. The Italian also reiterated his observation after the election of Donald Trump at the beginning of the month.

The concern in the markets is quite palpable. The Stoxx Europe 600, a pan-European stock index, has gained just 6.3% since the start of the year when the S&P 500

takes 25%. Above all, since the election of Donald Trump, the Stoxx Europe 600 has lost 0.2% while the S&P 500 has advanced 3.1%.

Deutsche Bank even fears that the election of Donald Trump will lead to a world where the American market rises when all the others fall, even though this has never happened in history.

>> Access our exclusive graphic analyses, and gain insight into the Trading Portfolio

In a recent note, the bank UBS looked at a set of projects that the European Union must succeed in order not to end up being eclipsed.

“Europe faces not only major economic challenges, but also a long list of political, institutional and geopolitical challenges that require urgent attention. A second Trump presidency makes Europe's political agenda even more urgent , to prevent him from falling further behind,” she wrote.

The good news is that UBS believes that if Europe manages to move forward on these projects, the potential for equities to rise is dizzying. “We believe the Stoxx 600 could deliver a 60% upside if EU policies close the productivity and innovation gap with the US, bringing European valuations closer to US price-to-book multiples and by aligning trend growth with that of the United States,” argues the establishment.

Without going into the details of all the projects, we explain some of them and briefly list the others at the end of the article. Let us point out in passing that UBS obviously recognizes that these projects are not all new and that succeeding in them would not be easy.

Improve productivity, innovation and competitiveness

UBS cites here several already published reports such as that of Mario Draghi but also that of the former President of the Italian Council, Enrico Letta. “The Draghi and Letta reports combine the most comprehensive description of the European Union's structural weaknesses with detailed recommendations on how to revive the European Union's lack of economic dynamism,” writes UBS.

The Draghi report proposes in particular to launch a European investment plan by issuing debt, so as to improve the competitiveness of numerous sectors, including energy, automation industries, defense, space and even transport. The annual investment is estimated between 750 and 800 billion euros. In addition to issuing debt, private capital could be mobilized, in particular by resorting to securitization (the transformation of debts into tradable securities on the market).

The Letta report of April 2024 recommended deepening the single European market in many areas such as financial services, energy or telecommunications, by further harmonizing these markets at Union level. He also proposed establishing a code of business law at European level as well as European harmonization of tax policies. A very interesting point: the Italian suggested reforming competition law by no longer considering national markets as the relevant market but favoring the European market.

UBS also judges that having less concentrated (and therefore more competitive) markets than in the United States is a penalizing factor for European equities. “The conclusion of this analysis is that for Europe to be a global competitor in (several) areas, it could be useful for it to enable, or even support, certain companies to become European champions on the world stage. To do this, greater concentration should be allowed so that companies can take advantage of their size on the global stage,” it writes.

Making progress on the Banking Union and Capital Markets Union

UBS emphasizes that the banking union has not yet been completed, with a significant slowdown since 2017. This while this heavy project should ideally (according to it) result, for example, in a European deposit guarantee system and the removal of obstacles to cross-border banking operations.

In the same vein, the union of capital markets must be accelerated to allow European states to converge in matters, for example, of real estate financing or corporate bankruptcy rights. UBS cites in particular an idea from the economist Nicolas Véron, who proposes to amplify the role of Esma, the European Financial Markets Authority, by broadening its financing and its independence. This even if this initiative risks encountering political obstacles.

The Swiss bank also mentions recommendations from the European Central Bank dating from June which proposed, for example, relaunching the securitization market at European level, increasing the standardization and transparency of structured products, or even harmonizing the European legal framework.

Moving forward on a European defense policy

With the outbreak of war in Ukraine and the election of Donald Trump, very critical of the lack of investment by its transatlantic allies in defense, Europe will certainly accelerate military cooperation and increase expenses.

“We believe that European governments should place an increased priority on defense spending over the next decade, given the presence of an increasingly visible hostile actor on the eastern border (Russia, Editor's note) and “a potential reallocation of American security resources towards Asia”, estimates UBS.

The bank sees levers for cooperation, including the creation of joint ventures to source resources and industrial capacities. An existing example: the MBDA missile, a joint venture between Leonardo, Airbus and BAE Systems.

The bank points to a challenge in the form of a question: “how can the European Union overcome national interests and pool its military resources in R&D, supply and production, and establish a powerful military-industrial base ?”

Other important issues

UBS mentions a number of other challenges. The success of a new European enlargement (or at least of its preparation) is one. Currently, nine countries are candidates (Albania, Bosnia and Herzegovina, North Macedonia, Montenegro, Serbia, Ukraine, Georgia, Moldova and Turkey). “The timetable for future enlargement is unclear; a slow and prolonged process seems likely,” judges UBS.

For energy policy, UBS once again cites the competitiveness issues contained in the Draghi report. With in particular, as recommendations, a potential acceleration of the issuance of permits for renewable energies and the adoption of mechanisms which would decouple the prices of electricity from those of gas and oil.

The bank also believes that the European budget will have to be strengthened, in particular with more own resources, which will obviously require overcoming political obstacles.

Europeans will also have to agree on the definition and content of the European Union's “autonomy strategy”, a vague concept, but which can refer, for example, to access to technologies, components ( semiconductors) and key raw materials. “We believe that increased automation and digitalization will likely be one of the main levers for increasing Europe's strategic autonomy,” writes UBS on this point.

Latest project cited by UBS: migration policy for which “an effective and well-coordinated approach remains a 'work in progress'” at the European level while “geopolitical frictions and climate change suggest that migratory pressure will not decrease “.