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European market drivers increasingly mixed By



Drivers of the European equity market are becoming increasingly mixed, UBS strategists noted on Thursday.

The bank says that their machine learning model, which uses macro time series to analyze European equities, typically explains about 70% of what drives these markets. Historically, one or two dominant themes, such as 10-year yields and Chinese economic activity, have significantly influenced the (SXXP) index, particularly in sectors like luxury goods, autos, mining, and chemicals.

In addition, factors like gas prices, the Euro, and the AI narrative have been crucial for sector relative performance.

Recently, however, the clarity of these macro and sector drivers has diminished, UBS highlights.

“The [SXXP] index has rallied more than our model can explain which suggests either an overshoot or more idiosyncratic drivers,” strategists said. “The wide confidence band on the model output in recent months suggests it is more the idiosyncratic drivers that have been dominating,” they added.

At the industry group level, there is evidence of cyclical and value stocks, such as energy, banks, and materials, witnessing an overshoot, although these stocks were initially valued at recessionary levels.

In contrast, defensive sectors like Food, Beverage & Tobacco (FB&T) and Health & Personal Care Products (H&PP) have shown some recovery from their previous undervaluation, partially due to increased risk premiums linked to the recent French elections.

Citing scores from their Relative Equity Valuation System (REVS) framework, UBS analysts now favor sectors such as utilities, transportation, media, construction materials, energy, real estate, and pharmaceuticals.

On the other hand, they have the least favorable outlook on mining, tech hardware, software, consumer staples, food, beverage & tobacco (FB&T), and health & personal care products (H&PP). Moreover, analysts see increasing risks of a short squeeze in the automotive sector and have thereby adjusted their stance to neutral on autos.

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