Written by Naomi Rovnick
LONDON (Reuters) – Next year looks bad for Europe, with its financial markets already hit hard by U.S. tariff concerns and political turmoil in France and Germany, but some investors are calling a peak in pessimism and looking for bargains amid the gloom.
MSCI data showed that European stocks are expected to underperform US stocks by the highest level in at least 25 years, while the euro fell more than 5% against the dollar, and some forecasters expect continued bad news to pull it below the dollar. one.
But with the region's market prices falling, investors have become increasingly interested in bargain hunting, arguing that assets are fully priced for further disappointment and could rally strongly if the geopolitical and economic backdrop brightens.
“We believe Europe could be a positive surprise for non-risk investors,” said Caroline Gauthier, co-head of equities at Edmond de Rothschild. “We are close to reaching the peak of negativity and this is good news.”
MSCI's broad index of continental European stocks has risen 4.6% this year, while a similar US index has risen 29%, as artificial intelligence fever delivers stunning gains for the technology giants that dominate Wall Street stock markets.
“Valuation levels in Europe (now) are much more attractive,” said Sonia Loud, chief information officer at Britain's largest asset manager. Legal and general (LON:) Investment Management,
She added that the $1.5 trillion investment manager had not yet raised exposure to Europe broadly, but the warmth was in stock market sectors such as automakers and luxury goods that would benefit if the slowdown in China eased and US tariffs were less punitive than feared.
Euro zone productivity is weak, and the European Central Bank cut its growth forecasts on Thursday along with its fourth interest rate cut this year, as cautious households hold on to their savings.
However, among the signs that traders are seeing that market prices are extreme, German stocks are starting to rise. The index is up 4% so far in December and is poised for its best month since March.
Amundi, Europe's largest asset manager, expects strong gains for the euro next year, while other major European investors are turning to falling French stocks.
Germany is expected to hold snap elections in February after Olaf Scholz's divided coalition collapses, and while Friedrich Merz, a contender for the top leadership, supports stimulus spending, that will also require unusually strong unity between the parties.
“We're trying to make the most of the pessimism we're seeing in Europe,” said Kevin Touzet, a member of the investment committee at Carmignac European Asset Management, adding that he was building positions in European multinationals that have similar businesses to their American counterparts but trade less. On low ratings.
To be sure, economic trends in the eurozone remain dismal. The bloc's Citi Economic Surprise Index is below zero, showing that the data is lower than widely expected.
But they stopped falling sharply, indicating that the severity of negative data shocks to markets has subsided.
“Bearish positions (in Europe) have reached extremes,” Citi strategists said on December 10, recommending clients buy into the region because monetary and government stimulus will benefit economically cyclical companies in sectors such as manufacturing and travel.
European assets are cheap “for good reasons,” said Stephen Bell, chief European economist at Columbia Threadneedle, pointing to the economic difficulties facing the region.
But he added that the asset manager was looking for opportunities among cheaply valued French stocks that could rise if the country's budget pressures eased.
Wall Street bubble?
Potential US tariffs will push inflation and US interest rates higher by the spring of 2025, sparking a rush to invest in “cheap” international alternatives to US stocks, Michael Hartnett, a strategist at Bank of America, said in a note to clients.
US stock markets depend heavily on the fate of shares of big technology companies, whose runaway gains have led to so-called concentration risk, which rises as the number of stocks that dominate the market falls to record levels, according to data from the investment group. Simcorp (CSE:) Show.
Hartnett expects a “major correction” in US stocks in the first half of 2025, and expects European companies to attract more investment for this reason.
($1 = 0.7920 pounds)
