Global themes are where European equities can find their magic

What themes will influence European equities?

Three stand out: Donald Trump as President of the United States; China and its stimulus efforts and its response geopolitically to the new US President; the prospects for cyclical recovery, i.e. for economies globally to experience an upswing. 2024 has been a tough year for those more economically sensitive companies that we would classify as ‘cyclicals’, particularly those that have a direct or indirect link to China. We expect that to be an important part of the debate for 2025 in European equities.

Where do you see the most compelling opportunities?

Two of the three following opportunities initially do not sound very European. One is US infrastructure. We are only about one third of the way through the US Infrastructure Investment and Jobs Act, an enormous stimulus package implemented by President Joe Biden in late 2021. A revocation of the Act by President Trump may lead to lower funds for selected projects, but expenditure on necessary modernisation and upgrading of ageing infrastructure is not going away. This should support strong growth for several stocks that are European listed, but which have very large businesses in US materials i.e. aggregates, cement, and several of the supporting solutions around roads and highways.

Another big opportunity is semiconductors. The second half of 2024 was tough for European semiconductor stocks, particularly those companies that make machinery for the semiconductor supply chain. They sold off since July, partly related to a slower cyclical recovery – the parts of their businesses that are exposed to smartphones, computers, and automotive markets. But the other side of their business is artificial intelligence – and this will become an increasingly dominant part of their business over the longer term.

Finally, very much a European theme, is the airline industry. Externally, you would not look at an airline and say it is the highest quality business. It is competitive. Pricing and value proposition is everything. Margins are quite thin. Fuel costs rise and fall. You are managing big safety-critical pieces of equipment in the planes. But there is a supportive combination of strong demand as holidays are still booming – contrary to consumer hesitancy elsewhere – plus a supply shortage of planes in the market.

What is the single most underappreciated risk for European equities?

Upside risk, i.e. European markets rise. I think the downside risks are well scrutinised. Post the US election and post some further political tumult within Europe, in Germany and France, we have seen a big disconnect between the performance of US equities and European equities. Much will depend on those themes I mentioned earlier – Trump presidency, China, and cyclical recovery.

What do you see as the most important takeaway for an investor allocating to Europe in 2025?

The European equity market is not European society, it is not Europe’s economy, it is not, thankfully, European politics. It is very global in terms of its underlying economic exposure. In one of the recent debates around US tariffs and how that might hurt European companies that export to the US, it is not that big a risk. The European stock market derives around 26% of its revenues from the US. But the bulk of that (20%) is from businesses that are based in the US, serving their local customer base, leaving approximately 6% in scope for tariffs.¹ This helps to put context around the claim that Europe is very global.

¹Source: Morgan Stanley Research, MSCI Europe Index, revenue exposure to the US, October 2024.