Donald Trump’s US election victory in November has cast yet darker shadows over an already gloomy outlook for the European economy. Though it is yet to be seen whether Trump will follow through on placing tariffs on European goods, his re-election has done little to increase optimism on the continent.
Political uncertainty also remains a major headwind in Europe. In the same week as the US election, the German coalition government led by Olaf Scholz fell apart with a snap election scheduled for February 2025. It follows similar instability in France.
From a stockmarket perspective, the Stoxx Europe 600 index has also underperformed the S&P 500 by 20% this year – one of the widest gaps on record.
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The S&P 500’s outperformance has further increased its valuation premium relative to the MSCI Europe ex UK index which, according to Karen Ward, chief market strategist for EMEA at JP Morgan Asset Management, prompts the question: is the discount on European stocks justified, or should investors consider reallocating towards the undervalued opportunities on the continent?
“Despite a new US president with an ‘America first’ agenda and Europe’s sluggish recovery, there are still strong reasons to diversify equity allocations regionally,” she says. “While the S&P 500’s earnings are expected to grow strongly in 2025, European earnings forecasts are more modest. European stocks also trade at a much lower multiple on these more reasonable earnings forecasts, suggesting that a significant degree of underperformance is already factored in.
“Europe’s valuation discount is partly due to its sector composition, with fewer tech stocks compared with the US. European indices are more weighted towards industrials and commodities, which have faced challenges from global demand and a weaker Chinese economy. However, every European sector currently trades at a larger-than-average discount versus their US counterparts, reflecting general investor pessimism.
“Policy stimulus in Europe may yet surpass market expectations. While the US seems eager to impose tariffs on China, relations with Europe are likely to remain less hostile. The ECB [European Central Bank] is expected to continue easing, encouraging consumer spending, and European leaders have fiscal tools to counter aggressive trade policies. Efforts to deploy the remaining EU recovery fund may also accelerate.”
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Some of the headwinds facing Europe are not new. Even before Trump’s election victory, the continent was battling weak growth and a manufacturing slump, intertwined with the political uncertainty in its traditional powerhouses – France and Germany.
Meanwhile, GDP growth forecasts remain weak. According to the International Monetary Fund’s October economic outlook, Europe’s real GDP is set to grow 1.6% in 2025 – the same as in 2024.
“Recently, there has been a shift in global trade dynamics,” says Abhi Chatterjee, chief investment strategist at Dynamic Planner.
“There is a clear path of transformation of emerging market economies from a ‘manufacture and export’ model to a ‘consumer’ one, predominantly in China and India. This has attracted growing imports from manufacturers in Europe, predominantly in the luxury and automotive sectors,” he explains.
Read the rest of this article in the December issue of Portfolio Adviser magazine