Sphere, the Leading UK Platform of 2023


European stocks seem to be better positioned for higher efficiency (expected risk-return ratio) compared to the US, both historically and in the short-medium term.

Another week of high volatility has come to a close for banks on the stock exchange, and the forecasts for the sector in both America and Europe remain cautious after recent critical events that have affected some institutions. In the US, Comerica and Keyport also appear to be struggling, while in Europe Deutsche Bank lost almost 9% in one day on the stock exchange.

Among investors looking for solutions and guidance for their portfolios, some are turning to predictive analyses that use artificial intelligence. Let's see what they say.

The growth component prevails in the medium term

Compared to January, the situation has changed. At the beginning of the year, artificial intelligence highlighted a trend improvement in the financial sector with greater resilience of European stocks compared to American ones, in a context of uncertainty and volatility, compared to the last few months of 2022. This indication was based on the reduction of uncertainty about risk-return estimates and the outperformance of the value factor, which is characteristic of financial sector stocks compared to the growth factor.

As explained by MDOTM, a company specializing in the development of AI-driven investment solutions, "In light of recent macroeconomic data released in Europe and the United States, which have shown a moderate slowdown in inflation, Sphere (MDOTM's AI platform) currently predicts a greater probability of a reversal in favor of the growth factor on financials in the medium term. In this scenario, events concerning SVB and Credit Suisse, which occurred in March, have increased volatility and uncertainty for financial stocks. In particular, the latest analysis dated March 22nd highlights greater uncertainty for American financials compared to European ones.

Portfolio suggestions

At the portfolio level, MDOTM's artificial intelligence suggests maintaining a neutral position on American financials in the short-medium term and being moderately overweight on European financial stocks. The preference for European stocks is motivated by several reasons: greater efficiency (expected risk-return ratio) of European financial stocks compared to American financial stocks, both historically and in the short-medium term, reflecting a greater overall resilience of the European financial sector thanks to a more robust regulatory ecosystem. Moreover, from a diversification standpoint, there is a higher benefit to holding European financial stocks in the portfolio (at the same expected return) than American financial stocks, justifying the preference.

Analysis of market regimes

Sphere’s models examine markets daily, monitoring the current regime's trend and evolution. The analysis is conducted at various levels: global (e.g., equity vs. bond), geographical (e.g., European equities), and for each sector (e.g., European financial sector). The model uses artificial intelligence to objectively evaluate macroeconomic, fundamental, and market data. The obtained recommendations (e.g., over/underweight) are employed to support investment decisions in tactical/strategic portfolio management.

Originally published by Lucilla Incorvati on Il Sole 24 Ore

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