Europe Is More of an AI Powerhouse Than Most Think
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The European stock market is packed with more than enough AI winners to offset its lack of technology shares.
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The region’s own version of the artificial intelligence trade is helping to power a surprisingly strong year for the Stoxx 600 index. It’s kept pace with the S&P 500, despite a modest 9% exposure to tech, against 44% for the US benchmark. The performance is all the more striking given Europe’s greater vulnerability to rising oil prices and slower economic and earnings growth.
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A Citigroup Inc. basket of European AI enablers has rallied 46% over the past year, less than the 60% surge in a portfolio of US AI winners, but with far less volatility along the way. While semiconductors are the main drivers, Europe has much to offer beyond a few direct AI champions. Its industrial sectors are heavily exposed to data center demand, while adoption of the technology has the potential to power the next leg of the AI trade.
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“Europe is in the very early stages of the AI adoption cycle,” said Citi strategists led by Beata Manthey, pointing to industrials, healthcare, IT, communication services and financials as poised to benefit. “The impact on real GDP and labor productivity thus far seems negligible, but there is potential for substantial investments to facilitate AI adoption going forward.”
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Industrials account for a fifth of the Stoxx 600, the largest weighting after financials. The latest earnings season has confirmed Europe’s biggest industrial companies as major players in the AI trade. Clear evidence of this came from power infrastructure names, with electrical equipment manufacturer Schneider Electric SE and industrial automation provider ABB Ltd. flagging triple-digit surges in data center demand as they raised their forecasts.
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Electric cable manufacturer Prysmian SpA has profited from European and US electrification needs for some time, but new winners are emerging. Kingspan Plc surged this week after increasing its guidance on strong momentum in data center construction and M&A deals. Even perceived AI losers such as software firms SAP SE and Capgemini SE, and advertising agency Publicis Group SA have reported accelerating revenue linked to demand for the technology.
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Powerful, AI-inspired gains mean that some industrial companies are now pricey. Meanwhile, the latest volatility episode in semiconductor stocks made investors more cautious about the most-direct capex beneficiaries. The market now prices higher risks on future growth and earnings.
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Still, some stocks look attractively valued considering the investment cycle that’s expected to peak in 2028. Selectivity will be key to identifying which names to back, according to Barclays Plc industrial analysts.
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After assessing about 500 data-center projects, the Barclays team picked out overweight-rated Belimo Holding AG and Alfa Laval AB in cooling, plus Atlas Copco AB and VAT Group AG for semiconductor-linked demand. Among reasonably valued electrical companies, they cited Schneider and Legrand SA. They are cautious on power generation equipment suppliers Siemens Energy AG and Wartsila OYJ Abp, which both have underweight ratings.
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Analysis of earnings transcripts shows that AI gains are increasingly broad-based. “Measurable benefits from AI are spread out across multiple sectors,” said Barclays strategists including Magesh Kumar Chandrasekaran. “Notably, measurable cost and efficiency benefits have emerged as a key discussion point, with increasingly meaningful commentary on realized gains,” the strategists said.
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Europe is arguably in a sweet spot. Corporate balance sheets are healthy and free cash flow yields are much higher than in the US. With S&P 500 companies focusing on capex rather than buybacks, European peers have a card to play: a market with bigger shareholder returns, lower stock issuance, healthier financials, and significantly fewer of the AI risks linked to semiconductor volatility or Chinese competition.
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While Europe clearly trailed in the early part of AI innovation, this isn’t necessarily a bad thing, according to Goldman Sachs Group Inc. strategists including Sharon Bell. Rather, Europe needs to ensure it capitalizes on AI’s potential for productivity gains, especially given the region’s sharply aging population, the strategists said. Europe is behind in data center roll out, and will need to spend considerably more on energy infrastructure to support this. That’s expected to trigger a supercycle for its utilities.
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“We have seen previous waves of technology where the first movers and innovators overspend, and the companies that ultimately benefit are those able to take advantage of the original investment, not those that pay for it,” they said.
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