Europe finds itself “in the midst of a perfect storm”, says The Economist. Growth faces “stiff headwinds” and electorates are “routinely tossing their leaders overboard”. Donald Trump is planning tariffs. Europe’s catalogue of problems is long, says Simon Nixon in the Financial Times. Growth has “stalled”, regulation is “burdensome”, energy prices are “high” and manufacturing is under pressure from China.
Yet with so much pessimism around, there is a “very low bar” for positive surprises that could boost stocks. So what might go right? Unexpectedly large interest-rate cuts by the European Central Bank (ECB) would help. On the political front, an end to the war in Ukraine could improve sentiment. Finally, German elites are slowly coming around to the idea that the country must reform its self-defeating “debt brake”, which has long been an obstacle to higher growth.
A large Chinese stimulus in 2025 would also boost European equities, says Frédérique Carrier of RBC Wealth Management. The Middle Kingdom is a “key export destination” for the continent’s goods.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
A strong start to 2025 for European stocks
Economic sentiment is “on the floor” in Germany, yet European stocks have enjoyed a surprisingly strong start to the year, says John Authers on Bloomberg. The DAX index is up 7% already this year, with France’s CAC 40 not far behind. Bank of America’s latest monthly survey shows global fund managers have raised their “European weighting… by the most in any month since 2015”. It seems the continent’s stocks have simply become too cheap to ignore, giving a substantial “margin of safety” for investors. As Andrew Lapthorne of Société Générale notes, MSCI Europe is trading at a record 40% discount to US stocks on a forward price/earnings basis.
Germany has been in recession for the past two years, yet the country’s stocks have been the best-performing major European market over that period, says Pierre Briançon for Breakingviews. The blue chips of the DAX are large multinationals geared to global growth. Only a fifth of the DAX’s sales actually originate in the home German market, with 24% from America and 18% from China.
But a looming tariff war with Trump could soon choke off that release valve. Escaping Germany’s “grim economic reality” is becoming harder and harder for investors. DAX earnings look to have fallen by 9% for the full year 2024, according to a note from Deutsche Bank, with declines driven mainly by plummeting car-industry earnings.
Nevertheless, earnings look set to enjoy a “strong recovery” in 2025, with 11% year-on-year growth powered by technology, industrial and financial shares. Analysts’ year-end target for the DAX is 23,000 points, a further 7% gain from the current level.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
-
HMRC confirms crypto ETN ISA rulesWith crypto ETNs now technically available for UK retail investors, HMRC has confirmed they can be held in an ISA – but there’s a complication
-
Pensioners targeted in fine wine scams – the tactics to watch forWine has emerged as the latest lure in investment fraud, with pensioners being specifically targeted by scammers
-
Pierre-Édouard Stérin wants to make France great againConservative billionaire Pierre-Édouard Stérin is seeking to lead a political and spiritual renaissance across the Channel. The planning looks meticulous
-
Global investors have overlooked the top innovators in emerging marketsOpinion Carlos Hardenberg, portfolio manager, Mobius Investment Trust, highlights three emerging market stocks where he’d put his money
-
Pinewood Technologies: a drive for growthPinewood Technologies’ platform is one of the best in the business. Investors should buy in
-
'EV maker Faraday Future will crash'Faraday Future Intelligent Electric is failing dismally to live up to its name, says Matthew Partridge
-
Investors should cheer the coming nuclear summerThe US and UK have agreed a groundbreaking deal on nuclear power, and the sector is seeing a surge in interest from around the world. Here's how you can profit
-
8 of the best houses for sale with folliesThe best houses for sale with follies in the grounds – from a five-storey Victorian Gothic tower in Tonbridge, Kent, to a former mill in Oxfordshire with gardens that include a folly on an island in a lake
-
A tale of two Reits – why performance matters for valuationAEW UK and Regional are two Reits that are valued very differently, despite a shared focus on properties outside London
-
Healthcare stocks look cheap, but tread carefullyShares in healthcare companies could get a shot in the arm if uncertainty over policy in the US wanes, but are they worth the risk?
