HSBC: Investors Shifting From French to UK Equities Amid Fiscal Concerns

European equity funds are rotating capital out of France and into the United Kingdom, driven by mounting concerns over France's fiscal stability, according to a new report from HSBC. The bank noted that while overall European funds remain resilient, a clear shift in investor sentiment is underway.

France Downgraded on Fiscal Worries

In a Sept. 23 report, HSBC announced it had cut its rating on French equities to "underweight". The downgrade was attributed to a combination of a worsening fiscal backdrop, weaker economic forecasts, and deteriorating analyst expectations.

This specific concern for France contrasts with the bank's more positive view on the broader region. HSBC stated that European equity funds have been resilient, supported by improving economic data surprises and business sentiment.

Broader European Market Outlook

Reflecting this broader optimism, HSBC recently raised its year-end price target for the pan-European STOXX 600 index to 680. The bank cited a growing shift by European companies towards their domestic markets as a key driver for the upgraded forecast.

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Historically, the fourth quarter has been the strongest period for both equity fund flows and market performance, HSBC noted. This follows a third quarter in which global equities, as measured by the FTSE All-World index, have risen 2.4% so far.

Key Sector Views

HSBC also provided its outlook on several key European sectors, highlighting where it sees opportunities and risks:

• Technology: The bank remains "overweight" on the tech sector, which it says has the strongest earnings growth outlook for 2027, with consensus forecasts pointing to 27% growth. However, it cautioned that expectations have been weakening recently.
• Financials: High bond yields continue to support financial stocks. With investor positioning still below historical highs, HSBC sees room for further buying, which could be supported by its economists' forecast for two more European Central Bank rate hikes in December and February.
• Healthcare: HSBC holds a "neutral" rating on the healthcare sector. It has a weaker earnings outlook, with consensus forecasts calling for 5% growth in 2026 and about 9% in 2027.