Citi's European equity strategy head, Beata Manthey, believes the recent turbulence for cyclical stocks tied to economic health has created an attractive entry point. With a turn in economic data and supportive policy measures, the worst might be over for several of the region's most beleaguered sectors.
Surprisingly resilient economic figures from the eurozone are providing a solid foundation. The impact of the Hormuz Strait blockade has hit some Asian competitors harder, redirecting a portion of orders and supply chains toward Europe. Concurrently, fiscal stimulus programs across multiple nations are propping up growth momentum.
S&P Global data from August showed the eurozone's flash composite PMI climbing to 52.1, a nine-month peak that beat the anticipated 51.7 and marked a second consecutive month of expansion. The manufacturing PMI rose from July's 51.9 to 52.8, the highest since May 2022, while the output index hit 53.4, its strongest reading in 54 months.
Demand indicators are equally encouraging. New manufacturing orders grew at the fastest pace in 40 months, with export orders recording their first increase since February 2022. A surge in demand for AI-related technology products and expanding European defense spending are the primary forces behind this upswing.
Germany, the eurozone's traditional engine, saw its manufacturing PMI jump from 52.2 to 54.1, a 51-month high, signaling a robust rebound in specific industrial segments. Adding to the positive picture, Citi's economic surprise index, the pattern of earnings estimate revisions across a broad range of industries, and the recovery in business activity during the summer months all point to the European economy progressing in the right direction.
"Autumn is a very good time to invest in cyclicals," Manthey said, while cautioning investors to adopt a selective approach. She added that it's reasonable to conclude the worst might be behind them and suggested investors should at least consider lifting any underweight positions.
On portfolio allocation, Citi prefers domestically-focused stocks over exporters heavily reliant on international markets and consumer-facing shares, despite the latter showing recent resilience.
European policymakers are taking meaningful action to shield vulnerable industries, Manthey noted. She highlighted the automotive and chemical sectors, which have faced intense pressure but may now be past the hardest phase. The recent introduction of a steel tariff framework, modeled on U.S. measures, has already boosted domestic European steel prices. Producers able to sidestep the tariffs stand to benefit, which Manthey describes as "a good example of where protectionism could actually be positive for Europe."
The broader strategic rationale is that Europe can reinforce its economic resilience through procurement preferences, a 'buy European' approach, and targeted tariffs. However, the primary risk to this thesis remains energy prices. For struggling industrial sectors, a true tailwind would require sustained declines in energy costs, but geopolitical conditions have so far prevented that from materializing.