Citi's Manthey Talks EU Budget Negotiations

**SPEAKER_1** (0:02)
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**Stephen Carroll** (0:07)
European earnings are starting to flow in as global markets are being dominated by the swings in the AI trade and the uncertainty created by the Iran war. Let's discuss now with Beata Manthey, head of European Equity Strategy at Citi. Beata, good morning, good to have you back with us. On the AI story, how do you see that playing out in earnings season in Europe? Are there consequences evident? Beyond those few tech names that are based here?

**Beata Manthey** (0:32)
Absolutely.
European equity market doesn't have that much exposure via tech to AI story. This is why, actually, in the past few weeks, when AI worries have been playing out through the market, it has outperformed, right? But it does have links to this broader build out of AI via basic resources. So you can see these stocks being under pressure or broader industrial base as well, right?
So this is something to bear in mind. Now, from our perspective, given the market has done so well, most of the markets are hitting all time highs. Despite all the worries and problems we've had in the first half, markets are up 10% globally. Some pause was due, right? And now we have to step back, and this is where the reporting season comes handy, to step back and think, what are the next six months or the second half of the year is going to look like? And of course, our eyes have to be on earnings and on the reporting season. Now, what I have to say, on Europe, I am really encouraged by what we are seeing in the earnings revision trends, so the direction of the analyst forecast. And to some, it's not very intuitive, and it's actually happening on many fronts. So there are three dimensions of surprises in terms of positivity of it. Number one is the size. Actually, earnings revisions in Europe this week have hit almost all time highs. Handful of times it's been higher. So perhaps from this level, it's hard to, as it is a very high level, it's hard to see them improving.

**Caroline Hepker** (2:14)
Right.

**Beata Manthey** (2:16)
But when I look underneath the surface, we have the second dimension, breadth of these earnings revisions.
80% of sectors on level 2, so out of 24 sectors in Europe, are seeing upgrades. And a very similar story is happening in the broader set of sectors in other regions around the world. So this type of broadening tends to be very conducive or a lead on cyclical outperformance. And the third one, really very important, the last dimension, timing. All these upgrades are happening against negative seasonality trends. When that happens, historically, it's been a good lead on upgrades continuing over three to six months. So actually, with 90% hit ratio, 10% of the time, it didn't happen, but 90% of the time, upgrades continued. So that's quite encouraging.

**Caroline Hepker** (3:11)
OK, so you're encouraged on Europe. You're thinking about AI and the volatility and also the huge stock volumes that we've seen in terms of that trade. Look, I wonder what more needs to happen, though, actually, to attract that global investor into European businesses, if you say that the outlook is so bright. I mean, I was reading just this morning about Takeichi over in Japan. This does seem to be taking shape, this idea of investing more into domestic assets. I mean, is this the kind of, you know, something that we've talked about a lot for Europe, for the UK?
Do you think there'll be any similar policy, you know, to come in that sense, you know, to try to drive that more positive story in Europe?

**Beata Manthey** (3:51)
Absolutely. So it is a constructive view on Europe, but it's a constructive view on global cyclicals as well. So Japan for us is actually an overweight. Continental Europe is a neutral.
So we see some sectors having headwinds like exporters to China, while others, like banks, for example, are seeing very, very good upsides. They have to be selective, but a large set of sectors is doing well and could continue to do well.
My eyes are on the European next seven-year budget. So that's a longer term story. It's being negotiated this year. It's going to be approved next year. So are we going to see any regulatory changes in this respect? Or perhaps we've been speaking about that in the past by European, right?
So will the government have some levels that they will need to buy from the European companies, which would be very positive as well? So this fiscal and this type of regulatory changes, it's happening slowly, but it's happening. It's still a tailwind.