From Laggard to Leader: Europe’s Markets Eye Recovery in 2025

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The outlook for Europe in the year ahead appears grim, with its financial markets reeling from U.S. tariff concerns and political instability in France and Germany. However, some investors believe the pessimism has peaked and are searching for undervalued opportunities amid the uncertainty.  

European stocks are set to underperform the U.S. by the widest margin in at least 25 years, according to MSCI data, while the euro has declined over 5% against the dollar, with some predicting it could drop below $1. Despite this, falling valuations are drawing bargain hunters who argue that the market is already priced for further disappointment, setting the stage for a potential rally if geopolitical and economic conditions improve.  

“Europe could surprise underexposed investors positively,” said Caroline Gauthier, co-head of equities at Edmond de Rothschild. “We are nearing a peak in negativity, which is encouraging.”  

A broad MSCI index of European stocks has risen 4.6% this year, significantly lagging behind a 29% surge in a comparable U.S. index fueled by tech-driven gains. Yet, Sonja Laud, CIO of Legal & General Investment Management, noted that Europe’s valuation levels are now far more attractive. While not yet broadly increasing exposure to Europe, Laud highlighted sectors like automotive and luxury goods as potential beneficiaries if China's slowdown eases and U.S. tariff concerns diminish.  

Despite weak productivity in the eurozone, downgraded growth forecasts by the European Central Bank, and cautious consumer spending, some markets are showing signs of recovery. Germany's DAX index, for example, has gained 4% in December, marking its best performance since March.  

Amundi, Europe’s largest asset manager, predicts a strong rebound for the euro in the coming year, with French stocks also gaining favor among major investors. Germany faces snap elections in February after the collapse of Olaf Scholz’s coalition. While leadership contender Friedrich Merz supports stimulus measures, such policies would require rare cross-party cooperation.  

"We're capitalizing on Europe's pessimism," said Kevin Thozet of Carmignac, adding that the firm is investing in undervalued European multinationals with business models similar to U.S. companies but at more attractive prices.  

Although eurozone economic data remains lackluster, Citi’s economic surprise index shows that negative shocks are easing, which could point to stabilization. Citi strategists recommend buying into European markets, expecting government and monetary stimulus to benefit cyclical industries like manufacturing and travel.  

Columbia Threadneedle’s Steven Bell acknowledged that European assets are undervalued for good reason, given the region’s economic struggles. However, the firm is exploring opportunities in low-cost French stocks that could rally if the country’s fiscal pressures ease.  

Meanwhile, Bank of America strategist Michael Hartnett anticipates that U.S. tariffs will drive up inflation and interest rates by spring 2025, prompting investors to turn to cheaper international alternatives. He predicts a "major correction" in U.S. stocks in early 2025, particularly as reliance on a few dominant tech firms creates significant concentration risk. This shift, Hartnett suggests, could make European companies more attractive to global investors.

 

 

 

 

 

 

Paraphrasing text from "IReuters" all rights reserved by the original author.