Market Update 10th March 2025

Europe Resurgence

Last week I was at a conference which took a poll for what they thought would be the best performing asset class and best performing region in 2025. Unsurprisingly most people picked equities as the best performing asset class. What was surprising to me is the amount of people who still picked the US to be the best performing region. However, second place region was continental Europe, which was bottom the year before, but a lot has changed since then.

Europe has been in a lot of emails I’ve received over the past few weeks. There was a German election, defence spending noise, potential for Trump tariffs in the EU, and a more hopeful outlook for an end to the Ukraine war. The latter two causing the most uncertainty on the continent currently.

Germany had their general election. The winner was Friedrich Merz of the CDU/CSU party, and it was one of the biggest voter turnouts in 40 years. The proposed policies are to encourage investments and boost business growth through cuts in regulation and tax and reduce energy prices.

For example the CDU is looking at cutting corporate tax from around 30% to 25%. The DAX 50 has already performed around 15.6% YTD (in Euros, 17.2% in GBP) and on the back of potential cuts in tax and regulation the trend looks set to continue. Germany is about 19% of the MSCI Europe ex-UK index. Just for reference the MSCI Europe ex-UK is up 10.7% (in Euros, 12.6% in GBP), S&P 500 is -1.7% YTD (in USD, -4.7% in GBP), the UK all share is up 5.7% (in GBP), and the UK 100 is up 7.1% (in GBP).

The incoming German government are also committed to 2% of GDP to be spent on defence as a minimum. It is expected that other country’s defence spending is likely to go up. In 2024 there was a number of EU countries still falling short of the 2% target set by NATO. It also seems likely the NATO target will be increased in June to around 3%, which could translate to an increase of over 150bn euros.

The tariffs conversation has been rife mainly surrounding the US and China, Mexico and Canada. It has now moved onto growing trade tensions between the US and the EU. I’ve spoken to a few global and European equity fund managers and even an emerging market debt manager and all actually don’t see tariffs on Europe being too hurtful for a few reasons.

First the European manager talked about reforms which are needed in Europe and thinks tariffs will force these reforms to the top of politicians’ agendas and it sort of has. The EU wants growth and to be an attractive place for businesses to operate, so changes need to be made and are starting to be heavily discussed.

Secondly, the European market is very much a global market, revenue exposure is diverse. Only 40% of revenue comes from within Europe, less than 20% comes from the US and Canada, and around 20% again from Asia ex Japan.

Moving on from this, there is also an attractive valuation argument for Europe. I remember attending an event in February last year where a macro strategist highlighted Europe as an opportunity.

So as my colleague George talked about in Innovation a few weeks ago, earnings season has been fairly positive with the odd disappointment. I would say the few fund managers who I’ve talked to since last week would agree.

However, there are differences across the regions for how companies are being rewarded for good results. Good results from US mega cap names are not being rewarded because expectations of good earnings results are already priced into these businesses trading on high valuations. An example was NVIDIA which beat revenue expectations but its share price was down following that. This contrasts with European names which are delivering good results and are being rewarded with share price increases. European banks are an example, previously very unloved but beat estimates for Q4 and are being looked at more favourably by investors.

There are still headwinds for Europe but generally there is a positive outlook, some of this is because good quality businesses are trading on very low valuations which provide opportunity for active investors to gain additional upside as some macro themes play out in the region.

Emily Cave – Research Analyst

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