<p>In addition to the possibility that the German election may relax the &#34;debt brake,&#34; the undervaluation of European stocks, significantly improved relative earnings revisions, and potentially surprising European GDP are all quietly contributing to the rise of European stocks.</p>
<p>So far this year, the STOXX Europe 600 Index has risen over 8%, while the S&amp;P 500 Index in the United States has increased by nearly 2%.</p>
<p><img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/22938a11-6753-4d1d-a242-8e473995a19b.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/22938a11-6753-4d1d-a242-8e473995a19b.png"/></p>
<p>On February 24, UBS strategy analysts Andrew Garthwaite, Christopher McGann, and others released a report stating that UBS recommends overweighting European stocks for the following ten reasons.</p>
<h2>1. Germany may relax the &#34;debt brake&#34;</h2>
<p>On the evening of February 23, the results of the 21st German Federal Parliament election were announced, with the coalition party formed by the conservative Christian Democratic Union (CDU) and its Bavarian ally, the Christian Social Union (CSU), winning with approximately 29% support.</p>
<p>Previously, the market widely expected that a stable coalition government formed by the coalition and the Social Democratic Party (SPD) would temporarily relax Germany's fiscal austerity policies and ease the &#34;debt brake (Schuldenbremse).&#34; The debt brake stipulates that, unless in emergencies, the German federal government must keep annual borrowing within 0.35% of GDP and prohibits the 16 federal states from increasing new debt.</p>
<p>However, UBS also cautioned that amending the &#34;debt brake&#34; clause in the German constitution may allow for increased defense spending, potentially leading to a fiscal easing equivalent to 0.7% of GDP. However, this is only a minor boost, and the possible two-party coalition failed to secure the two-thirds majority required to amend the constitutional debt brake (coalition 29% + SPD 16% = 45%).</p>
<h2><strong>2. European stocks are severely undervalued</strong></h2>
<p>UBS stated that currently, the adjusted price-to-earnings (P/E) ratio of European stocks is 23% lower than that of the United States (whereas it should normally be 7% lower). Other indicators support this, such as the total return (dividends + buybacks) of the STOXX 600 being 1.5% higher than that of the S&amp;P 500, while according to the normal levels of the past twenty years, the total return of the STOXX 600 should typically be 0.5% lower.</p>
<p><img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/a9df9119-ea2c-4d6c-8ee5-ec2e9d1bd008.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/a9df9119-ea2c-4d6c-8ee5-ec2e9d1bd008.png"/></p>
<h2><strong>3. Relative earnings revisions in Europe have improved dramatically</strong></h2>
<p>UBS indicated that compared to the global market, the relative earnings revisions in Europe have significantly improved, and this improvement has not yet fully reflected in market performance
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/fc5f4c97-22a9-4aab-9b13-e68f16e7d37d.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/fc5f4c97-22a9-4aab-9b13-e68f16e7d37d.png"/></p>
<h2><strong>4. The gap in composite PMI new orders between Europe and the United States is narrowing</strong></h2>
<p>Data released last Friday showed that in February, the eurozone's composite PMI new orders fell by 0.6 points, while the U.S. composite PMI new orders dropped by 3.1 points, indicating that the gap between the two is narrowing. Additionally, the current policy uncertainty in the U.S. is very high, which could negatively impact business sentiment.</p>
<p><img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/384117e5-7aa4-4e00-985d-1414352289e8.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/384117e5-7aa4-4e00-985d-1414352289e8.png"/></p>
<h2><strong>5. The GDP gap between Europe and the United States is rapidly narrowing</strong></h2>
<p>According to UBS's forecast, the GDP growth rate gap between the U.S. and Europe is rapidly narrowing—this gap peaked at 3.2% and is expected to shrink to 0.7% by the end of this year.</p>
<p>UBS expects that Europe's GDP growth will accelerate to 0.9% this year and reach 1.1% by 2026. The European Central Bank emphasized that a 1% decrease in interest rates will lead to a 1% increase in GDP within a year, as 70% of corporate debt and housing mortgage debt in six EU countries is at floating rates.</p>
<p><img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/6be907bf-e8ce-4033-8579-6cda0ef412fe.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/6be907bf-e8ce-4033-8579-6cda0ef412fe.png"/></p>
<h2>6. <strong>Europe's ranking in global equity strategies is rising</strong></h2>
<p>UBS's latest scorecard shows that Europe's ranking in global equity strategies has risen by two places, now standing in second, while the U.S. has dropped by three places.</p>
<h2>7. Potential surprises in European GDP</h2>
<p>UBS stated that Europe's future GDP may bring surprises for two reasons:</p>
<p>First, Europe has removed defense spending from the excessive deficit procedure (EDP);</p>
<p>Second, UBS believes that a ceasefire between Russia and Ukraine will occur, leading to a drop in natural gas prices. A 10% decrease in wholesale natural gas prices could result in a 5-7% drop in retail natural gas prices and a 3-4% decrease in retail electricity prices.</p>
<h2>8. Trump may be willing to compromise on tariffs for Europe</h2>
<p>European economists pointed out that a 10% general tariff could slow Europe's GDP growth by 0.2%-0.7%.</p>
<p>However, Europe is currently importing more U.S. goods than it did eight years ago. If tariffs on U.S. goods entering Europe (such as cars and agricultural products) are reduced to domestic U.S. levels, and the EU increases defense spending, then Trump may be willing to compromise on tariffs for Europe.</p>
<h2><strong>9. Many investors have light positions in European stocks</strong></h2>
<p>On February 14, research reports cited the Financial Times of the UK, stating that the current market consensus believes that Europe will outperform other markets. However, UBS's data indicates that many investors still have light positions in European stocks but are willing to increase their investments
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/91d4945e-b724-43db-9d78-c7d69b336410.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/91d4945e-b724-43db-9d78-c7d69b336410.png"/></p>
<h2>10. Many European companies outperform their American counterparts</h2>
<p>From a fundamental perspective, UBS found that 27% of European companies outperform their American counterparts, and most of these European companies have cheaper stock prices</p>

<p>UBS pointed out the reasons including: Germany may relax the "debt brake"; European stocks are severely undervalued; the gap in GDP between Europe and the United States, as well as the gap in composite PMI new orders, is rapidly narrowing; Trump may be willing to compromise on tariffs against Europe; many investors have light positions in European stocks</p>

- UBS analysts recommend overweighting European stocks due to several factors, including potential easing of Germany's "debt brake" following recent elections.  
- The European Stoxx 600 index has risen over 8% this year, contrasting with a nearly 2% increase in the S&P 500.  
- Key reasons for this recommendation include undervaluation of European stocks, improving relative earnings revisions, and narrowing GDP growth gaps between Europe and the U.S.

UBS: Overweight Europe, We Have Ten Reasons