Investing in European banks could be safer and more profitable than the Nasdaq , particularly given the high valuations of Big Tech stocks, according to UBS equity strategists Gerry Fowler. Tech investors have been excitedly pouring money into Big Tech companies after solid earnings reports and intense hype around artificial intelligence. Shares of Nvidia , for instance, have rallied by 156% this year so far. However, Fowler, who is head of European equity strategy at UBS, warned that this enthusiasm might not last if expectations surrounding AI technologies do not materialize quickly enough. He explained that while stocks on the Nasdaq Composite require significant growth to deliver returns, European banks can offer similar returns at lower risk. Take Nvidia: the stock is currently valued at 36x price to sales, compared to its peers, which are valued at a multiple of around 5x. The stakes are high, as the chip designer will either need to increase sales rapidly to catch up with its valuations, or the stock will need to fall dramatically to be valued in line with its peers. “The European banks at the six and a half times [price-to-earnings] ratio don’t really need to give you much [revenue] growth to give you a 10% return,” Fowler told CNBC’s Squawk Box Europe Thursday. “In fact, when you add their buybacks and their dividends, they’re giving you a 10% return in the next year.” One of the main reasons for his confidence in European banks is their resilience amid changing interest rates. The strategist said UBS expects interest rates to rise further and stay “high for longer.” Typically, an increase in rates drives up a bank’s profitability. “And we think even in 2024, when you get rate cuts, they’re not particularly significant, and they’re not particularly fast,” Fowler added. “The earnings resilience of banks is great.” European banks are accessible to investors through ETFs such as the iShares STOXX Europe 600 Banks ETF in the U.S. and the Lyxor STOXX Europe 600 Banks in Europe. Despite recent challenges faced by some regional U.S. banks due to exposure to commercial real estate lending, Fowler believes European banks are safer as the regulatory environment is stricter in Europe than in the U.S. However, higher interest rates have increased the cost of borrowing and depressed valuations in the property sector, potentially increasing the risk to lenders. Analysts at Citi in April forecast European real estate stocks to fall by 20%-40% between 2023 and 2024 as the impact of higher interest rates plays out. In a worst-case scenario, the higher-risk commercial real estate sector could plummet 50% by next year, Citi said.
