AI-Driven Momentum and Undervalued Appeal Fuel Rally in European Banks

Economic

Summary:

European bank stocks are surging, powered by AI-driven cost efficiencies, resilient earnings, and renewed investor optimism, with expectations of continued growth and shareholder returns in 2026....

AI Efficiency Gains and Solid Earnings Power Europe’s Bank Rally

European banks, long viewed as part of the old economy, are experiencing a remarkable resurgence as investors increasingly see them as primary beneficiaries of the AI boom. In 2025 alone, major banks like Societe Generale and Commerzbank have posted triple-digit stock gains, with sector-wide indices rising more than 60%, far outpacing the broader European market. This momentum is not solely based on short-term earnings performance but is also driven by strategic transformations tied to artificial intelligence.

According to BlackRock, banks are not just participating in the AI revolution through revenue growth but also stand out as “cost winners.” Operational efficiency improvements and the potential to reduce headcount are key reasons why institutional investors are revising their expectations upward. UBS reinforces this by pointing to AI’s capacity to improve near-term bank valuations and drive longer-term profitability through expense reductions.

Shifting Economic Backdrop Reduces Headwinds

What sets the current rally apart is its resilience in the face of macroeconomic uncertainties. Earlier in the year, concerns about an impending recession and aggressive interest rate cuts by the European Central Bank weighed heavily on the sector. However, as those fears have diminished, confidence has returned. Credit growth in the eurozone remains robust, with corporate lending up 2.9% year-on-year in October and household loan growth reaching a 2.5-year high of 2.8%, indicating strong underlying demand.

Goldman Sachs projects a mere 1% annualized growth in bank operating costs from 2025 to 2027. At the same time, banks’ cost-to-income ratios are expected to improve by 130 basis points annually, implying that AI implementation is already yielding measurable efficiency benefits.

AI’s Role in Long-Term Valuation Upside

McKinsey estimates that artificial intelligence could deliver up to $340 billion annually in value for global banks, largely through 20% reductions in operational costs. Even if these savings emerge gradually, the long-term valuation implications are significant. UBS notes that the transformational impact of AI, particularly in reducing fraud, streamlining operations, and automating services, will continue to improve bank fundamentals.

The current price-to-book ratio of European banks stands at just 1.17, which is still 40% below their 2007 peak and significantly below US counterparts at 1.7. This undervaluation presents a compelling opportunity for investors seeking both upside potential and comparative value.

Earnings Momentum and Investor Revisions Add Support

Earnings expectations have been significantly revised upward in recent weeks. IBES data reveals that 12-month forward earnings growth forecasts have reached their highest levels since 2023. This is backed by recent analyst actions, which reflect increasing confidence in banks’ performance amid improving macroeconomic signals and technological transformation.

BlackRock’s Helen Jewell anticipates that European banks could return as much as 20–25% of their market value to shareholders over the next three years through dividends and share buybacks. These projections make the sector particularly attractive for income-focused investors, especially in a low-growth environment.

Risks and Structural Concerns Remain

Despite the optimism, the sector is not without risks. The ECB has warned of “unprecedentedly high” exposure to global shocks, ranging from geopolitical instability to climate crises and currency volatility. Furthermore, excessive enthusiasm surrounding AI has sparked concerns of a speculative bubble, reminiscent of the early 2000s dot-com bust. The IMF and the Bank of England have both urged caution about overpricing future gains.

Nevertheless, investors appear willing to look beyond these uncertainties, especially as merger activity and strategic consolidation reshape the landscape. The acquisition of Mediobanca by Monte dei Paschi di Siena is seen as a transformative deal for Italy’s banking sector, with expectations for similar consolidations across Europe.

The convergence of undervaluation, AI-driven transformation, and stable economic conditions is rewriting the investment narrative for European banks. While structural challenges and external risks remain, the sector’s strong fundamentals, rising earnings, and efficient cost structures are fueling renewed investor confidence. As 2026 approaches, European banks are not just participating in the technological evolution, they are being revalued through it, with many now considered key players in the next wave of financially sound, tech-enabled growth.

Source: Reuters

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Justin

Stocks

Economic

Chinese electric vehicle maker Xpeng said Monday it will start producing vehicles in Malaysia in 2026 in partnership with EP Manufacturing Berhad (EPMB), shifting from an export-led model to a focus on localized production.

Based on the semi-knocked down (SKD) production model, the Guangzhou-headquartered EV maker's partially assembled vehicles will be completed at EPMB's facility in Malacca, about 110 kilometers south of Kuala Lumpur.

The company did not disclose the specific timing for the production, nor did it announce any manufacturing targets.

The partnership marks Xpeng's third localization push abroad, following its collaborations with Magna Steyr in Austria and Handal Indonesia Motor in Indonesia, both also using the SKD model.

"Establishing a local production project in Malaysia is a significant milestone in Xpeng's global strategy and underscores our long-term commitment to the ASEAN region," said James Wu, vice president at Xpeng.

Xpeng said the Malaysian venture reflects its shift from vehicle exports to localized production, and will also help serve the region's right-hand drive market. The company's cars are currently imported and distributed by Bermaz Auto, a key shareholder of EPMB.

Besides Malaysia, Southeast Asian countries with right-hand drive vehicles include Brunei, Indonesia, Thailand and Singapore.

Chinese automakers, including Xpeng, have been reshaping the EV landscape in Southeast Asia, leveraging their price competitiveness, advanced in-car features and strategic partnerships to accelerate localization. Chinese brands now account for more than half of the ASEAN EV market, particularly in Thailand and Indonesia, through names such as BYD, Chery and MG.

Backed by various incentives offered by local governments transitioning to clean energy, their presence has eroded the longstanding dominance of Japanese automakers, whose cautious approach to electrification has left gaps in the market.

Auto assembler Handal rides China's EV expansion into Indonesia

Xpeng's partnership strategy in Malaysia appears aimed at capitalizing on the country's excise-duty exemption for locally assembled EVs, as the tax break for fully imported EVs will be scrapped by the end of 2025. Local production will also help optimize supply-chain costs and improve operational efficiency, the company said, allowing it to tap its local partner's "mature manufacturing experience and market insights."

"Together, we are committed to delivering high-quality, intelligent EVs to Malaysian consumers and supporting the nation's sustainable industrial ambitions," said Hamidon Abdullah, founder and executive chairman of EPMB, an original equipment manufacturer.

Malaysia, which aims for EVs to account for 20% of total industry volume by 2030, topped unit sales in Southeast Asia in the first 10 months of the year with 655,328 vehicles, according to automotive research firm MarkLines.

Prior to its partnership with Xpeng, EPMB had struck similar deals with Chinese state-owned automakers SAIC Motor and BAIC Motor, as well as Great Wall Motor. The Kuala Lumpur-listed company also supplies parts to other Malaysia-based automakers, including Proton, Perodua, Honda and Mazda.

In a stock market filing on Monday, EPMB said it will begin assembling the Xpeng G6, a sedan, by March 31, and the X9, a multipurpose vehicle, by May 25.

Xpeng, which currently offers four types of premium vehicles, delivered 391,937 vehicles in the first 11 months of the year, up 156% from the same period in 2024. Over the same time frame, its overseas deliveries reached 39,800 vehicles, a 95% increase from a year earlier, supported by a sales and service network that spans 52 countries and regions.

Source: Asia_Nikkei

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Winkelmann

Stocks

Heading into 2025's last full trading week, the focus will likely be the incoming government data on the economy, which had been delayed by the federal shutdown.

While investors and Federal Reserve officials are hungry for an update, the shutdown did more than delay the reports; it muddied the actual data collection. Fed Chair Jerome Powell cautioned against reading too much into the reports, saying "we're going to get data, but we're going to have to look at it carefully and with a somewhat skeptical eye" until the year-end data comes out in January. Still, the jobs report will likely provide a sense of direction, and as Sarah Hansen writes, the news isn't likely to be good for the economy.

Just two days after the jobs report, we'll get the November Consumer Price Index, and that data is also not likely to be friendly. Forecasts call for inflation to tick higher above 3%, both overall and excluding food and energy. That's well above the Fed's 2% target. Also due are reports on retail sales and the Fed's favored inflation indicator, the Personal Consumption Expenditures Price Index. Our weekly economic calendar can be found here.

All this is happening while divisions grow at the Fed. For now at least, only one interest rate cut is penciled in for 2026. But expectations can (and likely will) change as the economic picture becomes clearer.

A Bad Week for AI Trade Leaders

Last week brought losses for artificial-intelligence-related stocks after shoddy earnings, as well as a slight boost in small-cap names. Two of the stocks that had been leaders in the AI tech rally—Oracle ORCL and Broadcomm AVGO—got battered after their latest earnings reports.

In mid-September, Oracle looked unstoppable, having nearly doubled in 2025. This included a 36% one-day jump on news that the firm had added $317 billion in performance obligations (revenue from contracts that have been signed but not yet fulfilled). Things soured when it was revealed that $300 billion of that came from a deal with ChatGPT creator OpenAI, which is reported to generate less than $20 billion in revenue per year. By the time Oracle reported earnings last Wednesday, its stock had lost a third of its value since Sept. 10. It had become a poster child for investor concerns about overinvestment and unsustainable borrowing to fund AI spending.

The company's earnings report only made things worse, as reported revenue and operating income fell short of expectations, while management said it would be spending more on its data center buildout. Oracle lost another 10% on Thursday and 6% on Friday, wiping out more than its entire September rally. Morningstar equity analyst Luke Yang lowered the stock's fair value estimate to $286 from $340, and he now thinks it is undervalued.

Investors also found Broadcom's earnings lacking. Even as the company posted record revenues, the focus appeared to be on its commentary that its now-booming AI-chip business has lower margins than non-AI products. The stock, which had weathered the slump suffered elsewhere in the tech sector in recent weeks, tumbled 11% on Friday. Morningstar senior equity analyst William Kerwin urges investors to buy the dip: "Broadcom's AI chip business is accelerating, and we see even greater astronomic growth ahead ... investors now have a terrific opportunity to buy into an AI winner."

Small-Cap Value Stocks Spring to Life, for Now

While tech stocks took losses last week, the on-again/off-again rotation to small caps was back on. Small-cap value stocks rose nearly 2.0%, and mid value stocks were up 1.7%. Commentators attributed some of the bounce to market expectations of more interest rate cuts next year, which is challenging to square with conflicting guidance from the Fed. But with large-cap stocks up 20% this year, ahead of the 15% gain on small-company stocks, it's possible it's just a reflection of repositioning more than anything fundamental.

Source: Morningstar

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James Whitman

Bond

Economic

Central Bank

Bank of Japan officials are likely to start selling the central bank's pile of exchange-traded funds as early as next month, according to people familiar with the matter, a process expected to take decades to complete.

The bank will offload the assets little by little to avoid roiling markets as was decided at a September policy board meeting, the people said. The holdings had a market value of ¥83 trillion ($534 billion) at the end of September and a book value of ¥37.1 trillion, according to the central bank.

The September decision set out plans to sell the ETFs at a pace of ¥330 billion per year based on book value. A simple calculation indicates the process will take around 112 years if that pace remains unchanged.

The BOJ wants to make the market response of the sales almost unnoticeable like it did for the sales of stocks brought from beleaguered banks in 2000s, the people said. The selling of those stocks was completed in July after about a decade of offloading that didn't disrupt financial markets.

With Japan's stock market rising sharply over the last couple of years, the market value of the assets has surged.

The central bank expects to keep a steady pace of monthly sales, according to the people. There is no change in their stance of minimizing disruption in the market, they added. Still, the bank may stop selling the ETFs if there is an event similar to the Global Financial Crisis in 2008, the people said.

Sumitomo Mitsui Trust Bank won an auction to be the conductor of the sales, the central bank reported earlier this month.

Source: Bloomberg

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Samantha Luan

Key points:

· China tells GCC conditions are ripe for free trade deal

· FM Wang Yi says China-GCC FTA will signal importance of free trade

· China, Saudi seek closer coordination on wider diplomacy, security issues

· Wang emphasises energy and investment cooperation with Saudi Arabia

China's foreign minister has pressed the Gulf Cooperation Council to conclude long-running talks on a free trade agreement with China, attributing the urgency to rising protectionism and unilateralism as free trade comes "under attack", according to a Monday statement from the ministry.

Chinese Foreign Minister Wang Yi is on a three-nation tour in the Middle East that began in the United Arab Emirates and is expected to end in Jordan. He met GCC Secretary-General Jasem Mohamed Albudaiwi in Riyadh on Sunday, when he also met top Saudi officials separately.

"The talks have lasted for more than 20 years, and conditions for all aspects are basically mature, it is time to make a final decision," he said during a meeting with Albudaiwi, according to the Chinese foreign ministry.

A successful FTA will send a "strong signal to the world about defending multilateralism," Wang said, adding that China was supportive of the bloc strengthening its strategic autonomy and coordination, and advancing its integration process.

China has interests in deepening cooperation in economy, trade, investment and other fields with the GCC as well, Wang said.

CLOSER COORDINATION WITH SAUDI

China and Saudi Arabia agreed to closer communication and coordination on regional and international issues, with Beijing lauding Riyadh's role in Middle East diplomacy and security, other statements following a meeting between the nations' foreign ministers showed.

Wang's meeting with Saudi Arabia's Foreign Minister Prince Faisal bin Farhan Al-Saud also took place on Sunday in the Saudi capital.

A joint statement published by China's official news agency Xinhua did not elaborate on the issues where the two countries would strengthen coordination, but mentioned China's support for Saudi Arabia and Iran enhancing their relations as well as support from both sides for the "comprehensive and just settlement" of the Palestinian issue.

"(China) appreciates Saudi Arabia's leading role and efforts to achieve regional and international security and stability," said the statement released on Monday.

Wang told his Saudi counterpart that China regarded Saudi Arabia as a "priority for Middle East diplomacy" and an important partner in global diplomacy, a Chinese foreign ministry statement on Monday said.

He also encouraged more cooperation in energy and investments, as well as in the fields of new energy and green transformation.

In a separate meeting with Saudi Crown Prince Mohammed bin Salman, Wang underscored China's readiness to play a part as the "most reliable partner" in the Middle Eastern country's revitalisation, as well as "inject more stabilising factors" to realise peace and security in the region, another foreign ministry statement showed.

The countries have agreed to mutually exempt visas for diplomatic and special passport holders from both sides, according to the joint statement.

Source: TradingView

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Gerik

Economic

Investor Caution Deepens Ahead of Pivotal Central Bank Meetings

At the beginning of the week, Asian equities experienced a noticeable retreat, reflecting widespread investor caution as several critical monetary policy decisions loomed. The MSCI index covering Asia-Pacific equities outside Japan slipped by 1%, with South Korea's benchmark plunging as much as 2.7%. This shift was particularly significant given the South Korean market’s outstanding performance throughout 2025.

Investor sentiment has become increasingly cautious as the year approaches its final trading days. According to Pepperstone’s Chris Weston, many institutional players have already concluded their year-end book adjustments, reducing the overall trading activity. Although liquidity remains reasonable for the moment, a significant decline is expected in the upcoming holiday week, potentially exacerbating market sensitivity to any unexpected developments.

Markets Brace for Mixed Signals from Central Banks

Global focus is now concentrated on a slew of interest rate decisions due this week. The Bank of Japan is expected to raise its benchmark rate by 25 basis points to 0.75%, signaling a shift in tone following years of ultra-loose monetary policy. In contrast, the Bank of England may reduce its rate by the same margin to 3.75%, indicating growing concerns about slowing growth or easing inflationary pressure. The European Central Bank, along with Sweden’s Riksbank and Norway’s Norges Bank, is widely anticipated to maintain current policy settings.

The diverging approaches of these central banks underscore the varying economic conditions across major economies. While Japan appears to be normalizing monetary policy amid persistent inflationary pressures, other central banks are weighing the balance between growth and inflation. The decisions taken this week will likely clarify whether rate cycles globally are converging or further fragmenting.

US Data to Return After Shutdown, Adding Another Layer of Uncertainty

Adding to the complexity of the week, the US is set to release key economic reports that had been postponed due to the recent government shutdown. The November jobs report and the monthly Consumer Price Index (CPI) are expected to offer clearer insights into the strength of the US economy and the Federal Reserve's path forward. The yield on the 10-year US Treasury note slightly declined to 4.182%, reflecting cautious optimism among investors ahead of these upcoming figures.

This delayed data could inject new volatility into financial markets, particularly if results diverge from prevailing expectations. Whether the data confirms a soft landing or reintroduces fears of overheating will influence global investor positioning in the final weeks of the year.

China’s Property Sector Reemerges as a Systemic Risk

Concerns about China’s housing market resurfaced after Vanke, one of the country’s largest and previously most stable property developers, failed to secure bondholder approval for an extension on a maturing debt obligation. The company has called for a second bondholder vote, but failure to reach consensus increases the likelihood of default. This development once again throws the spotlight on China's broader real estate crisis, which has already destabilized many firms in the sector.

Morningstar analyst Jeff Zhang emphasized the broader implications of a potential Vanke default, warning that even state-supported firms are now being scrutinized for financial stability. This marks a potential shift in investor perception, from viewing some developers as relatively safe bets to reclassifying them as systemic vulnerabilities.

In a related sign of economic weakness, China’s November data revealed declining retail sales and industrial output, along with another monthly decline in new home prices. This reinforces the perception that Beijing’s support measures have yet to generate a meaningful recovery in consumer demand or investor confidence.

Mixed Market Signals in Japan and Energy Markets

Despite a strong reading from Japan’s latest Tankan survey, which revealed business sentiment among large manufacturers hitting a four-year high, Japanese equities still trended downward. The Nikkei 225 index fell 1.4%, indicating that broader concerns such as global interest rate changes or tariffs are overriding positive domestic indicators.

Meanwhile, in energy markets, Brent crude rose to $61.46 per barrel, buoyed by concerns around supply stability. These include ongoing geopolitical tensions between the US and Venezuela, and incidents such as a fire alert issued at Imperial Oil’s Canadian refinery and a drone attack on a Russian facility, which ultimately resulted in no reported damage.

As 2025 trading winds down, the markets are navigating a confluence of cautious investor behavior, fragmented central bank actions, and delayed macroeconomic data. Coupled with renewed fears over China’s real estate sector and geopolitical energy risks, the global financial environment remains fragile. The week ahead is likely to be pivotal in shaping year-end market sentiment and early 2026 positioning. Whether the data and decisions confirm resilience or further instability will determine the direction of risk appetite in these final sessions of the year.

Source: Reuters

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Andrew Korybko

Economic

Political

The US approved Nvidia’s sale of advanced chips to Armenia late last month as part of a $500 million AI data center that’ll see 20% of its capacity reserved for Armenian companies and the remaining 80% sold to US-based firms doing business in the region according to Bloomberg. These ambitious tech plans build upon Armenia’s rich Soviet-era technological legacy, early tech education for children, and impending national high tech strategy, but there’s actually much more to them than a simple business opportunity.

This move comes shortly after the US “poached” Armenia from Russia’s sphere of influence by replacing its role in the Armenian-Azerbaijani peace process, which took the form of brokering August’s peace declaration between the two. Armenia also agreed to the creation of the US-controlled “Trump Route for International Peace and Prosperity” (TRIPP) along its southern border. TRIPP is expected to lead to the Turkish-led injection of Western influence across the South Caucasus and into Central Asia.

It's therefore not for naught that two US think tank experts recently co-authored an article in the Washington Post where they argued for increased American engagement with Armenia as the strongly insinuated means for more effectively containing Russia. Tech wasn’t mentioned in connection with this, but there’s a compelling logic behind why this new AI data center was chosen as the flagship project of their new relations, which will be led by a new joint Armenian-American company, Firebird.AI.

The “Fourth Industrial Revolution”/“Great Reset” (4IR/GR), which is centered on the interconnected trends of AI, Big Data, and the Internet of Things, is driving the cutting-edge economic-technological developments across the world that the US envisages leading per July’s AI Action Plan. One month later at the end of August, several weeks after the US-mediated Armenian-Azerbaijani peace declaration and TRIPP, Armenia and the US signed an MoU “regarding an AI and Semiconductor Innovation Partnership”.

This was followed by the US approving Firebird.AI’s ambitious plan to set up a $500 million Nvidia-powered AI data center for US-based firms in the region, thus leveraging Armenia’s location to turn it into a bastion of US 4IR/GR influence in this part of Eurasia. The goal is to solidify the US’ influence over the South Caucasus and then have Armenia serve as the launchpad for expanding the tech dimension thereof into Central Asia in parallel with TRIPP’s expansion of US economic and military influence.

Some Armenian companies will benefit from this but the nation as a whole won’t. Its people’s digital-tech sovereignty is being ceded to the US since their data will be stored on Dell servers. Socio-political trends can then be analyzed by CIA algorithms for helping the US fine-tune propaganda for accelerating Armenia’s pivot away from Russia. Of relevance, the first phase of the AI data center will be operational in the second quarter of next year, which is around the time of Armenia’s next parliamentary elections.

The Carnegie think tank declared last month that “Armenia's Election Is a Foreign Affair” in their piece urging de facto meddling in support of Pashinyan. The planned AI data center is expected to play a role in this as was explained. Keeping him in power isn’t just about solidifying the US’ new sphere of influence at Russia’s expense, which will be costly for Armenia since Russia is its top trade partner, but enabling the US to transform this facility into a regional AI-assisted spy hub as part of a new Eurasian power play.

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