Jefferies flags key bullish and bearish themes in EU strategy

Following meetings with European Commission policymakers, Jefferies is "tentatively more bullish" on European markets, excluding those related to the energy transition, citing the EU's efforts to streamline regulation and strengthen the Single Market. The EU is targeting internal barriers equivalent to a 45% tariff on manufacturing and 110% on services, and is considering new revenue streams like fees on international parcels and tourist entries. However, Jefferies remains bearish on the EU's Clean Industrial Deal due to funding gaps and skepticism about the Affordable Energy Action Plan, noting that energy prices remain significantly higher than in the U.S.

Analysis

Jefferies' recent engagement with European Commission policymakers has resulted in a "tentatively more bullish" outlook on European markets, specifically excluding those related to the energy transition. This revised stance is supported by the EU's push to streamline regulation through its Omnibus Simplification Package, anticipated to reduce administrative burdens for corporates, with initial focus on sustainable finance and upcoming packages for defence, energy, chemicals, and autos. Furthermore, Jefferies highlighted the Commission's renewed efforts to strengthen the Single Market by addressing internal barriers, which the IMF estimates are equivalent to a 45% tariff on manufacturing and 110% on services, through measures like a digital product passport designed to unify labelling and facilitate cross-border recognition of qualifications. The brokerage also noted the consideration of new revenue-raising tools, including a €2 fee on small international parcels, a €7 tourist entry fee, and an EU-wide digital services tax, which could bolster investment capacity. Conversely, Jefferies remains bearish on the EU's Clean Industrial Deal, labeling it "unfunded" due to an estimated €300 billion shortfall expected from private sector contributions, where funding appears to be retracting rather than expanding. Skepticism also surrounds the Affordable Energy Action Plan, with European energy prices persisting at 3-4 times U.S. levels and proposed remedies considered "not entirely realistic," implying natural gas will likely dictate marginal power prices in the near future despite aims to lower electricity taxes and expand renewables.

Key Decisions for Investors

• Investors could consider adopting a more constructive view on European companies poised to benefit from regulatory simplification and deeper Single Market integration, which may reduce operational costs and improve market access.
• Maintain a cautious approach towards investments heavily exposed to the EU's Clean Industrial Deal and the Affordable Energy Action Plan, given the significant identified funding gaps for decarbonization and persistent challenges in achieving competitive energy pricing.
• It is advisable to differentiate between European sectors, favoring those likely to gain from reduced bureaucracy and enhanced trade facilitation, while critically assessing entities dependent on the successful and timely funding of the EU's current green transition strategies.