LIVE MARKETS-Tariff risks test Europe's rally, but MS sees rich pickings

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TARIFF RISKS TEST EUROPE'S RALLY, BUT MS SEES RICH PICKINGS

U.S. tariff threats have cast a shadow over Europe's early-2026 equity rally, prompting some houses like Citi to turn more cautious on the region.

But Morgan Stanley is staying constructive, arguing that the drivers lifting European stocks remain intact despite the noise.

"Coming into 2026, EU equities are seeing rising diversification inflows, a breakout from a formerly structurally widening valuation discount vs the US, increased multipolar drivers, and ever-rising stock-level dispersion," the bank's strategists including Marina Zavolock write.

While acknowledging the tariff flare-up over Greenland "complicates this picture somewhat", they stress that exposures are highly idiosyncratic and that upward revisions to U.S. GDP could offset potential EPS pressure.

Morgan Stanley says it has actually grown more constructive since its 2026 outlook in November, saying the winners will come from stock selection rather than broad factor calls.

To capture the upside, their preferred way is through their analysts' Top Picks. And following their recent conviction call on ASML ASML.AS, the MS strategists upgrade EU Semis, moving the sector to second place just behind banks.

Top overweight names with a target upside above 25% include Saint Gobain SGOB.PA, Experian EXPN.L, Rheinmetall RHMG.DE, ICG ICGIN.L, LSEG LSEG.L, Kering PRTP.PA, Publicis PUBP.PA, Universal Music UMG.AS, EssilorLuxottica ESLX.PA, Adyen ADYEN.AS, SAP SAPG.DE, Deutsche Telekom DTEGn.DE, Compass CPG.L and Flutter FLTRF.L.

(Danilo Masoni)

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