u/Content_Lab_792

Uber Technologies Inc (NYSE:UBER) is exploring options for a full takeover of European delivery giant Delivery Hero AG (ETR:DHER), Bloomberg reported Friday, citing people familiar with the matter. The strategic move is intended to help the ride-hailing company better compete with DoorDash Inc (NASDAQ:DASH) outside the United States.

The news comes after the San Francisco-based giant disclosed this week that it had rapidly boosted its stake in Frankfurt-listed Delivery Hero. Working alongside financial advisers, the company is actively studying ways to increase its holding further, Bloomberg’s report said.

The equity story that powered European stocks has unraveled as investors seek shelter from a global energy shock and buy into the artificial intelligence frenzy.

European stocks had been zooming higher prior to the Middle East war as investors diversified out of the US and piled into the region’s much cheaper stocks. But that narrative has given way to new realities: Europe’s economy is exposed to inflation and supply chain disruptions caused by the conflict, and it’s home to almost none of the companies at the heart of the AI boom.

The Stoxx Europe 600 is now a laggard. The tailwinds that investors were betting on, such increased spending on infrastructure and defense, and advantageous monetary policy, have faded. Skepticism has returned. Inflows to European equity-focused funds have been completely erased as of this week, according to Bank of America Corp. strategists citing EPFR Global data.

Europe is “a region without a theme, with no memes and with too little growth,” said Bobby Molavi, a partner and head of EMEA execution services at Goldman Sachs Group Inc.

AI Void

The US has hyperscalers, while Asia is home to leading chipmakers and other firms essential to the AI build out. Europe, by comparison, has little to offer investors who want in on the technology trade.

The continent hosts heavyweight chip equipment maker ASML Holding NV, and a handful of other AI-related companies including Aixtron SE and STMicroelectronics NV. But their combined weight in the region’s benchmark is not significant enough to offset the massive industrial, consumer and defensive complex that investors have shunned this year.

Europe's Lack of Technology Exposure

Technology stocks account for roughly 8% of the Stoxx Europe 600, compared with 42% for the S&P 500. Semiconductors in particular make only 3.5% of the European benchmark versus about 18% for both the S&P 500 and the MSCI Asia Pacific.

At the index level, equity investment is about earnings growth. This year is shaping up to be solid for the Stoxx Europe 600, with analysts expecting an expansion of 11%. Yet that is only half of what’s forecast for the S&P 500 and roughly a third of growth seen for the MSCI Asia Pacific. What’s more, earnings growth in Europe is likely to be downgraded later this year as the energy shock bites.

“The continent is grappling with a systemic lack of AI exposure, which leaves European indexes largely on the sidelines of the most significant investment cycle of the recent past,” said Stephan Kemper, chief investment strategist at BNP Paribas Wealth Management.

Energy Dependence

At the same time, the Middle East war has delivered a harsh reminder to investors: Europe’s economy is highly vulnerable to energy shocks.

The European Union imports 57% of the energy it needs, and over 90% of the oil and gas it consumes. The US, by contrast, is a net exporter of oil and fuel, a status that helps shield its economy when global energy supplies tighten.

“As long as there is no clear normalization of shipping through the Strait of Hormuz, Europe should carry a higher risk premium given its greater exposure to imported energy and renewed inflation pressure,” said Andrea Gabellone, head of global equities at KBC Securities.

Monetary policy is also in focus. Last year, stocks got a boost when the European Central Bank slashed interest rates more aggressively than the Federal Reserve. That dynamic may now reverse, with traders expecting the ECB to hike borrowing costs three times this year while the Fed keeps rates steady.

There’s a risk that inflation and higher rates combine to hit economic growth, which had been expected to pick up from relatively low levels on increased spending from Germany’s €500 billion infrastructure fund, as well as European Union outlays on defense and the bloc’s recovery from Covid.

“The widening ‘growth gap’ between Europe and its global peers is increasingly seen as structural rather than cyclical,” said Kemper.

Diversified and Cheaper

The rallies in the US and Asia have been narrow, with the most impressive gains coming from a small number of AI-related stocks. By contrast, the European market is more diversified, with a broader sector exposure that could play in its favor if there’s a reversal in the tech frenzy. European stocks are also cheap.

Yet those arguments don’t appear to be swaying investors.

For HSBC Holdings Plc chief multi-asset strategist Max Kettner, heavy concentration in tech stocks isn’t a problem. The exposure indicators he tracks are still far away from sending a sell signal. Meanwhile, Europe is firmly on the sidelines.

“I think it’s an everywhere story, except Europe,” he said. “The problem with Europe right now, at least tactically, is you’re sitting in the middle like ‘I really need Hormuz to reopen, I really need this Middle East conflict to end, then I can buy banks again, maybe some of the cyclicals, maybe even consumer stocks.’”

When it comes to valuations, European stocks are trading at a discount to US peers both broadly, and within specific sectors. With a forward price-to-earnings ratio below 15, the Stoxx Europe 600 offers a 30% discount to the S&P 500. That compares with a 20% average discount over the past 20 years.

One potential explanation for why European stocks appear inexpensive is that headwinds are already factored into prices.

“This argument seems to be missing the point as Europe lacks the earnings velocity found in the US. Without a sector catalyst like AI to drive multiple expansion, low valuations are reflecting long-term stagnation rather than a buying opportunity,” said Kemper of BNP Paribas.

The lack of enthusiasm leaves European stocks as a way to gain some portfolio diversity, and regional companies as potential M&A targets given their lower valuations. For Molavi, there is at least one silver lining.

“Things are getting so bad that Europe might, as a construct, wake up and start to move fast and break things,” he said.

US tech giants including Alphabet and Amazon are tapping foreign debt market at an unprecedented rate

Big tech groups have embarked on a borrowing spree around the globe to fund the AI arms race as they seek to diversify their sources of funding beyond Wall Street to support runaway capital expenditure.

Google’s parent Alphabet had no foreign debt until last year, but in recent months it has sold the equivalent of more than $40bn in overseas bonds in euros, Swiss francs, British pounds and Canadian dollars.

On Friday, it is expected to wrap up its first-ever yen-denominated bond deal, with US bankers working overnight to pitch investors in Tokyo throughout the week, according to people familiar with the matter. 

The global debt binge underscores the drive for Silicon Valley heavyweights to tap new funding sources as their debt load increases.

Big Tech groups have recently increased their estimated AI spending to $725bn this year, leaving them with the lowest level of free cash flow in over a decade. 

The so-called hyperscalers, which are building huge data centres to develop sophisticated AI models, were now “exploring all available [currency] options”, said John Servidea, co-head of global investment grade financing at JPMorgan. 

Raising debt in foreign currencies allows them to “leave longer intervals between tapping the US market and build some scarcity value”, Servidea said. 

The deluge of AI-related debt sales from a range of companies in the US has started to overwhelm investors, who have become more selective and at times have demanded higher yields for deals that they deem more risky. 

Alphabet’s decision to borrow in euros and Canadian dollars last week was in part driven by Meta’s recent $25bn bond sale, which depleted investors’ appetite for similar tech borrowers, a person familiar with the decision said. Google declined to comment.

Currencies including Swiss francs and euros offer attractive borrowing costs due to lower policy rates. Some borrowers were also looking into raising debt in Australian and Singaporean dollars, according to bankers. 

To limit the cost of currency exchange, “some may consider leaving a portion of the proceeds in local currencies and swap a portion back to dollars”, said Dan Mead, head of investment-grade syndicate at Bank of America.

Foreign currency debt now makes up about 30 per cent of hyperscalers’ overall borrowing, according to Bank of America.

On Tuesday, Amazon followed Alphabet to tap the Swiss market in a bond sale that raised about SFr2.8bn ($3.6bn), weeks after borrowing €14.5bn ($16.9bn) in its largest Eurobond sale to date.

Teddy Hodgson, global co-head of investment grade debt capital markets at Morgan Stanley, said tech groups were moving quickly to establish themselves in foreign markets, which are smaller than the US debt pool, before investors were tapped out.

“It’s not a pleasant position to be in if your peers have already exhausted the capacity for hyperscalers when you want to pivot,” Hodgson said.

In markets such as the UK, tech borrowers can also reap the benefits of securing extremely long-term capital. Alphabet sold a rare 100-year sterling bond in February. 

Tech companies prefer bonds with long maturities to avoid frequent refinancings, said Scott Schulte, global co-head of investment grade debt syndicate at Barclays, which underwrote Alphabet’s century bond.

“They are arguably the modern-day railroad,” Schulte said. “It makes sense for them to issue longer maturities because AI is a long-term infrastructure.”

[FT]