Morgan Stanley sees European equities broadening as AI volatility drives diversification

Year-to-Date Index Gains

7-8%

Both European equities and the S&P 500 have increased by approximately 7-8% year-to-date.

Earnings Growth Forecast

16%

Consensus earnings growth for European equities is forecast to exceed 16% for the current year.

Revenue Source

55%

55% of European index revenues are derived from outside Europe.

§ 01 Executive Snapshot

What: Morgan Stanley reports that European equities are attracting fresh inflows due to AI volatility, with a focus on diversification.
Who: Morgan Stanley, Chief European Equity Strategist Marina Zavolok.
Why it matters: The report highlights a shift in investor sentiment towards European equities amidst AI-related volatility, which could reshape market dynamics and investment strategies.

European equities have matched the S&P 500 year-to-date, with both indices up roughly 7 to 8 percent, recovering from conflict-driven lows.
Around 90 percent of Europe's year-to-date index gains are attributable to AI-exposed sectors, including semiconductors and copper-linked metals, representing about 15 percent of the index.
Consensus earnings growth for European equities is forecast above 16 percent for the current year, with 55 percent of index revenues derived from outside Europe.

The ongoing volatility in the AI sector is prompting investors to diversify their portfolios, leading to increased interest in European equities, which are perceived as undervalued.
The historical context points to a decade-long trend of widening valuation discounts for European equities compared to the US, which has recently begun to narrow.

Immediate market consequences include increased inflows into European equities, particularly in sectors benefiting from inflation such as banks and real assets.
Long-term implications suggest a potential shift in investor focus towards European markets as a hedge against volatility in the US AI sector.

Potential risks include continued volatility in the AI sector, which could deter investment in European equities.
Economic factors such as sluggish GDP growth and weak PMI readings might still impact investor sentiment towards Europe, despite strong earnings forecasts.

Investors will be watching for further developments in AI volatility and its impact on market dynamics as well as any changes in oil prices that may affect European equities.
Upcoming earnings reports and economic indicators will signal the health of European equities and the effectiveness of the diversification strategy being adopted by investors.

§ 07

What is driving the interest in European equities?

The interest in European equities is being driven by AI volatility, prompting investors to seek diversification.

Who is the Chief European Equity Strategist at Morgan Stanley?

The Chief European Equity Strategist at Morgan Stanley is Marina Zavolok.

How have European equities performed year-to-date compared to the S&P 500?

European equities have matched the S&P 500 year-to-date, with both indices up roughly 7 to 8 percent.

What risks could impact investor sentiment towards European equities?

Potential risks include continued volatility in the AI sector and economic factors like sluggish GDP growth and weak PMI readings.