Citi Downgrades Europe Stocks on Political Turmoil, Upgrades US

(Bloomberg) -- Risks from France’s political upheaval helped trigger a Citigroup Inc. downgrade of European stocks, with its strategists preferring more growth-oriented US equities.

Most Read from Bloomberg

Strategists led by Beata Manthey lowered their view on European shares to neutral from overweight on “heightened political risks” as well as a narrowing market and potential for a further unwind. They upgraded US stocks to overweight from neutral, with technology and industrial shares in focus.

“We upgrade the US due to its substantially higher growth tilt relative to Europe, and more defensive nature in episodes of uncertainty,” the strategists wrote in a note. “Political uncertainty could cool US investors’ recent rotation into European equities for the time being.”

French President Emmanuel Macron’s shock announcement of a snap election last week sparked a rout that wiped off about $258 billion from the market capitalization of French firms. The nation’s sovereign bonds sold off amid warnings of further deterioration in the country’s finances.

Investors have recoiled from the prospect that Macron’s centrist, pro-business Renaissance party will lose further ground in Parliament in a two-round vote scheduled for June 30 and July 7.

“Prospects for a far-right majority in the French parliament has introduced considerable uncertainty, raising questions around fiscal consolidation, funding for Ukraine, and European industrial policy,” the Citi strategists wrote.

The shockwaves have been felt across European markets, with the region’s stocks losing 2.4% last week, sharply underperforming their US peers. The downgrade comes just a week after Citi predicted the pan-European Stoxx Europe 600 could rise a further 14% to a fresh record by mid-2025.

READ: French Politics Flips the Script on Bullish Europe: Taking Stock

Still, French markets began this week showing some signs of stabilization after far-right leader Marine Le Pen pledged to work with Macron if she prevails in the upcoming elections.

Analysts elsewhere are also more optimistic about the prospects for US stocks. Goldman Sachs strategists have boosted their year-end target for the S&P 500 Index for a third time, reflecting Wall Street’s optimistic outlook for earnings growth and the US economy.

Evercore ISI strategists are predicting another double-digit rally through the end of 2024, with the S&P 500 Index setting record after record. RBC Capital Markets strategists also noted that US stocks may benefit from safe-haven seeking if flows to European equity funds deteriorate due to political uncertainty.

--With assistance from Farah Elbahrawy.

Most Read from Bloomberg Businessweek

©2024 Bloomberg L.P.