BlackRock’s Investment Institute has upgraded European equities to neutral from underweight as it sees several potential positive catalysts looming.
After lagging for the past few years, European stocks are up 9.5% year-to-date, outpacing the S&P 500 index and the wider MSCI World index.
Even though Europe has already started the year strongly, BlackRock’s strategists see several catalysts that could boost cheap valuations in the region.
“With a lot of bad news priced into European equities, even prospects of good news could help them push higher,” they said in a note.
The strategists said a possible de-escalation in the Ukraine war and a peace agreement could lower energy prices in Europe, boosting its growth and lowering inflation.
Another catalyst could be rising defence spending and a potential fiscal loosening amongst Eurozone countries, they added.
“We expect more defence spending as the US has stated Europe is no longer a primary security priority,” the note said. “The EU now has an air of urgency that typically spurs action.”
“In Germany, the weekend’s election result could herald fiscal loosening – though it’s a long and uncertain road there,” it added.
BlackRock also said sluggish euro area growth and easing inflation would give the European Central Bank room to cut rates, which is why the firm has a preference towards European financials in particular.
The strategists did caution that Europe still faces “multiple structural issues, from lagging competitiveness to potential US tariffs – justifying some of Europe’s hefty valuation discount,” they said.
Bullish on China and the US
BlackRock has maintained its tactical overweight towards Chinese equities, as the recent tech excitement in the country could keep driving returns.
Apparent efficiency gains by AI startup DeepSeek have driven a surge in Chinese tech stocks in recent weeks, some of which have seen gains of up to 60% in a short period.
The broader Chinese equity market has rallied on the back of this, with the Hang Seng index up 16.8% year-to-date.
However, BlackRock is still cautious over the longer term, given “structural challenges” to China’s growth and risks posed by potential tariffs.
“President Xi Jinping’s recent meeting with private sector business leaders could signal a more supportive regulatory backdrop, yet the broader environment of US-China technology competition may present challenges,” the note said.
The strategists have kept their stance on US equities as overweight, citing mega-cap tech and other AI-linked stocks to keep driving returns as AI adoption grows.
