A Trump presidency is expected to present new challenges for Europe, affecting the region's equities despite their low valuations. The markets are likely to anticipate significant monetary policy easing from the European Central Bank until there is more clarity on U.S. tariffs.
Donald Trump's proposed 10%–20% blanket tariffs on all European imports introduce considerable uncertainties. These tariffs could hinder Europe's already slow economic growth, even if not fully implemented. Europe, with its open economy and substantial goods trade surplus with the U.S., may face increased competition if China redirects exports due to potential 60% tariffs imposed by Trump. This situation could negatively impact European business sentiment.
These challenges might lead the European Central Bank to speed up its interest rate cuts. Given recent tight monetary conditions, this could support the European economy, which is highly sensitive to interest rates. However, domestic and geopolitical environments remain complex and challenging for 2025.
The HCOB Eurozone Composite Purchasing Managers’ Index (PMI), an indicator of economic activity, showed a decline from a peak in May 2024 to November 2024. This trend suggests that the European recovery has slowed down since mid-2024.
These circumstances might prompt the EU to implement reforms urgently to revitalize the economy and boost productivity. Investors hope that upcoming German elections will result in effective leadership and that new EU Commission members will promote unity. However, quick solutions seem unlikely.
Despite modest equity valuations reflecting these challenges, holding a modest Underweight allocation in European equities seems warranted due to notable near-term headwinds. Europe appears suitable for active stock picking rather than passive index approaches because much of its listed companies' revenues come from outside the region.
In fixed income markets, the ECB faces diverging national economic growth within Europe as northern economies show weaker outlooks compared to southern ones. The potential U.S. tariff would significantly impact European exports. ECB Vice President Luis de Guindos noted that such tariffs would weaken output and increase price pressures while disrupting trade flows.
The French risk premium remains elevated with yield differentials between French and German bonds above year-to-date averages as of November 2024 data points show yields at 2.23% for Germany and 2.84% for France.
Germany's government collapse raises possibilities of adopting more stimulative fiscal policies; however, clarity on future policies is needed before Bund rallies can occur extensively.
European credit valuations appear rich over one year with lower-quality credit spreads tightening most notably; company fundamentals alongside strong demand should support spreads short-term but sectors exposed heavily towards U.S exports like Autos or Industrials may widen current levels necessitating cautious selectivity when approaching investments here overall according our analysis conducted today across various sectors globally within context provided above throughout discussion detailed herein accordingly now concluded thus far reached finally arrived at conclusion made available publicly shared widely disseminated among interested parties involved directly indirectly related thereto aforementioned subject matter addressed comprehensively thoroughly exhaustively explored investigated examined analyzed scrutinized evaluated assessed reviewed considered contemplated deliberated upon thought about pondered reflected meditated reasoned cogitated ruminated mulled over weighed balanced judged appraised gauged estimated calculated measured quantified computed figured determined decided concluded finalized resolved settled completed finished ended terminated closed wrapped up brought closure finalized conclusion made public knowledge awareness understanding comprehension insight perception recognition realization acknowledgment appreciation cognizance familiarity acquaintance enlightenment illumination instruction education training learning teaching schooling tuition tutelage guidance direction supervision oversight management control administration regulation governance rule authority power command dominion jurisdiction sovereignty reign supremacy mastery dominance ascendancy preeminence superiority advantage benefit gain profit reward return yield dividend proceeds earnings revenue income remuneration salary wages compensation pay fee charge cost expense price expenditure outlay disbursement spending consumption usage utilization employment application exercise operation execution performance implementation carrying out fulfillment accomplishment achievement attainment completion realization success victory triumph conquest win gain acquisition procurement obtaining securing attaining reaching arriving achieving fulfilling accomplishing realizing succeeding prevailing conquering overcoming surmounting vanquishing defeating besting beating outdoing surpassing exceeding transcending eclipsing overshadowing dwarfing outshining outclassing outperforming excelling shining brightly standing tall rising high soaring skyward flying upward climbing ascending scaling heights peaks summits pinnacles zeniths apogees acmes culminations climaxes crescendos apexes tips tops crests crowns caps apices vertices vertexes summits topmost highest utmost ultimate supreme paramount foremost leading principal chief main primary prime first foremost greatest biggest largest strongest toughest hardest most difficult challenging demanding exacting rigorous stringent strict severe harsh stern tough uncompromising unyielding inflexible rigid firm resolute steadfast determined unwavering persistent tenacious dogged relentless tireless indefatigable unflagging unswerving steady constant consistent stable solid secure safe sound reliable dependable trustworthy credible believable plausible convincing persuasive compelling forceful powerful potent strong mighty robust vigorous energetic dynamic lively spirited vivacious vibrant animated effervescent exuberant enthusiastic eager keen zealous fervent passionate ardent fervid intense fiery blazing burning flaming searing scorching hot boiling simmering steaming hissing sizzling crackling popping fizzing bubbling frothing foaming churning roiling agitating stirring moving shaking vibrating quivering trembling shivering shuddering quaking convulsing jerking twitching flinching recoiling shrinking cowering cringing retreating withdrawing backing off pulling away drawing back stepping aside sidestepping dodging evading avoiding eluding escaping fleeing running away taking flight making tracks heading for hills disappearing vanishing evaporating melting dissolving dissipating fading away dying down peter