Betting on European sovereignty
344 Tuesday, 23 September 2025 15:24
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For once, we will not be dealing with macro strategy in our weekly report. Last week was packed with macro events, from central bank meetings (Fed, BoE, and BoJ) to the usual Trump headlines (call with Xi, UK state visit). But none of these events brought surprises to investors. The Fed restarted its widely expected rate cut cycle, and the market narrative is now that the Fed's put will lift equities further. The Q3 earnings season will start soon, and overall, we have adopted a slightly more cautious stance in recent weeks, considering the rich valuation of US equities and the growth slowdown that is taking place in the US. Last week, Mario Draghi also delivered a “one year after” speech, warning that Europe must unite as China gains global market share. He also flagged regulatory hurdles facing EU companies in AI applications. This will be the focus of our weekly.
A year ago, former European Central Bank President Mario Draghi unveiled his landmark report on European competitiveness, outlining the barriers to growth that Europe faces and providing concrete recommendations on how to overcome them. Last week, European Commission President Ursula von der Leyen and Professor Mario Draghi opened a high-level conference to review the Commission's progress in implementing the recommendations set out in Draghi's report on the future of European competitiveness.
In this context, we have launched a new thematic strategy, which consists of identifying a basket of stocks to leverage this initiative, which has translated into new policy orientations and funding commitments. Since the publication of the Draghi report, the Commission has begun work on translating its recommendations into reality, focusing on a number of priority areas such as innovation, defence investments, decarbonisation, trade, finance and regulatory simplification.
As we show in the report, the Draghi report involves three core areas of focus, namely closing the innovation gap, decarbonising the economy and reducing dependencies. This has then been adapted into five key areas: defense and security, digital autonomy, access to raw materials, energy independence & productivity, and, secure health care and food.
Benefitting from the input of Kepler Cheuvreux’s equity analysts, our strategy identifies three top conviction stocks by area, leading to a 15-stock equal-weighted portfolio. One month after its launch, the strategy is living up to its promises, up 4.3% as of September versus virtually zero for the benchmark (Stoxx Europe 600).
More generally speaking, the overall European equity market context remains challenging on the back of weak growth prospects, an adverse trade agreement with the US and a sharp appreciation of the Euro versus the US Dollar. The STOXX Europe 600 is flat since the end of February. In our view, a bottom-up/ thematic approach to European equities adds significant value in this context. Our recently launched macro thematics, such as the German stimulus basket, the Ukraine reconstruction basket and the European sovereignty basket, have all generated significant outperformance versus benchmarks. We provide a performance update of these strategies in the report.
European equities: revisiting bond proxies. Against this backdrop of asymmetric risk on US equities and rather weak European macro, we recommend seeking shelter in bond proxies, notably the inflation-protected ones. While Fed rate cuts expectations have already been adjusted significantly, rising odds of Trump’s control over the Fed would pressure real rates further. This is a process that could help “long duration” equities, notably those that have a capacity to defend their top line. Within these, we would favour the most domestic ones. We flag notably real estate, telcos, and utilities.
Week ahead: US retail sales and the FOMC meeting will be the key market movers. The Fed is widely expected to restart its rate-cut cycle, on pause since the end of 2024, with a 25bp rate cut. In Japan, the nationwide CPI will be released on the same day as the BoJ meeting on 19 September. We don’t expect the BoJ to hike rates amid the current political turmoil. In the UK, the August CPI will be released the day before the BoE meeting (no change expected).
Performance of the KC Solutions European sovereignty basket (15 stocks, equal-weight, started 18/08/25)
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