LIVE MARKETS-AI doubts drive sharpest European defensive rotation since COVID

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AI DOUBTS DRIVE SHARPEST EUROPEAN DEFENSIVE ROTATION SINCE COVID

European markets have seen their sharpest rotation from cyclicals into defensives since the March 2020 COVID-19 shock, according to BofA Global Research, a reversal driven by growing doubts over the AI spending boom.

European cyclicals have underperformed defensives by 11% this month, second only to the 18% gap seen during the pandemic selloff, with semiconductor, mining and capital goods stocks leading the selloff, while traditionally defensive sectors such as food and beverages and household goods have outperformed.

BofA attributes the shift to mounting concerns over AI monetisation and the market's willingness to continue funding large-scale AI infrastructure investments. The brokerage remains 'underweight' cyclicals and AI-linked sectors, while favouring defensive and "anti-AI" industries.

Major European AI stocks have come under pressure as concerns over the sustainability of the AI spending boom, political uncertainty in France and tensions in the Middle East dampened risk appetite, offsetting support from a generally solid earnings season.

Despite the rotation, the STOXX 600 has gained about 1% since early October. BofA remains negative on European equities, however, and sees nearly 10% downside for the benchmark index by the second quarter of next year.

(Kanishka Ajmera)

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