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Global themes are where European equities can find their magic
Portfolio Manager Tom O’Hara argues that favourable geopolitical dynamics and the potential for a cyclical recovery as growth picks up could help to drive European equities in 2025.
10 Dec 2024
4 minute watch
4 minute watch
Key takeaways:
- Geopolitical tensions, both domestic and external have provided a challenging backdrop for more economically sensitive companies in Europe.
- The prospects for European equities in 2025 are likely to be shaped by some large, thematic factors, from US policy under a new administration to China’s economic stimulus measures, and the potential for better growth in the economy.
- We see plenty of opportunities to leverage the global nature of European stocks, and companies less directly tied to geopolitical uncertainty, across infrastructure spending, semiconductors, and even potentially the airline industry.
What themes do you expect to most influence European equities in 2025?
The big themes for 2025 as it appears right now will be Donald Trump as President of the United States, it will be China and its stimulus efforts and its response geopolitically to the new US President. And within all of that, it will be about the prospects for cyclical recovery.
2024 has been a tough year for those more economically exposed, or economically sensitive, companies that we would classify as ‘cyclicals’. Especially 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?
So some of the most compelling opportunities for European equities in 2025 will be… actually, two of the three themes I am going to mention are not very European, or at least they don’t sound very European. One is US infrastructure. We are only about one third of the way through that enormous stimulus package, the IIJA [US Infrastructure Investment and Jobs Act], which was implemented by President Joe Biden in late 2021, which led to about a 40-50% increase in spending on the highways, on roads and rail infrastructure, and so on.
We are still kind of in the early innings of that, and we expect that to continue to support quite strong growth for a number of stocks that are European listed, but which have very large, meaningful businesses in US heavy-side materials – that’s aggregates, that’s cement, and a number of the supporting solutions around highways.
The other big opportunity – again very global in theme – is semiconductors. The second half of 2024 has been really tough for European semiconductor stocks. And in particular those companies that make machinery for the semiconductor supply chain.
They have sold off since July, partly related to a slower cyclical recovery – so the parts of their businesses that are exposed to smartphone markets, PC markets, automotive markets. But the other side of their business, and what will become an increasingly dominant part of their business over the longer term, is artificial intelligence. And that is a theme which is very attractive.
Finally, very much a European theme. We think the airline space is interesting. Now from the outside, you wouldn’t necessarily look at an airline company and say it is the highest quality of businesses. It is a tough market to compete in. Pricing and value proposition is everything. Margins are quite thin. Fuel costs can go up and down like crazy. You are managing these big safety-critical pieces of equipment in the planes. And so it can be quite tough.
But right now we think there is a very supportive combination of strong demand, which is oddly going against the grain of consumer weakness, or consumer hesitancy. Holiday demand is still booming. And combined with that, there is a bit of a supply shortage of planes in the market.
What is the single most underappreciated risk for European equities?
I would say right now that the single most underappreciated risk for European equities is upside risk. I think the downside risks have been well and truly scrutinised. Even in recent weeks, post the US election and post some further political tumult within Europe, in Germany and France. We have seen a big, big disconnect between the performance of US equities and European equities and so I think depending on those themes that we mentioned at the outset of this update – China, Trump presidency, cyclical recovery – the most underappreciated risk for Europe in 2025 is upside risk.
What do you see as the most important takeaway for an investor allocating to Europe in 2025?
We talk about this time and time again. European equities is not European society, it is not European GDP, 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 of a risk. Yes, the European stock market on the whole derives about 25-26% of its revenues from the US. But about 20-21% of that is actually businesses that are based in the US, serving their local customer base.
So that is part of not getting too worried about the tariff risk as we go in 2025, but it also helps to put context around the claim that Europe is very global. And what we try to do is invest behind those global champions whose prospects are not determined by German politics, by French politics, by European GDP growth.
Sources and definitions
Past performance does not predict future returns.
Cyclical: Companies or industries that highly sensitive to changes in the economy (eg. mining), or companies that sell discretionary consumer items (such as cars).
GDP: Gross domestic product (GDP) is the value of all finished goods and services produced by a country, within a specific time period (usually quarterly or annually). When GDP is increasing, people are spending more, and businesses may be expanding, and vice versa. GDP is a broad measure of the size and health of a country’s economy and can be used to compare different economies.
Heavy-side materials: Basic building materials, across cement and aggregate, bricks and blocks, plaster, metal and stone materials, etc.
IIJA: The IIJA (Infrastructure and Jobs Act) was a large-scale policy to invest in US infrastructure, across roads, transportation, water and technology, with a focus on climate change mitigation, signed into law by US President Biden on 15 November 2021.
Margins: The amount by which company revenues exceed the costs of a business.
Tariffs: A tax or duty levied on imported goods or services, commonly used as a tool to protect domestic markets or industry.
Upside/downside risk: The uncertain potential for better performance (upside risk) or falling performance (downside risk) for a financial instrument, market, sector or economy.
10 Dec 2024
4 minute watch
4 minute watch
Key takeaways:
- Geopolitical tensions, both domestic and external have provided a challenging backdrop for more economically sensitive companies in Europe.
- The prospects for European equities in 2025 are likely to be shaped by some large, thematic factors, from US policy under a new administration to China’s economic stimulus measures, and the potential for better growth in the economy.
- We see plenty of opportunities to leverage the global nature of European stocks, and companies less directly tied to geopolitical uncertainty, across infrastructure spending, semiconductors, and even potentially the airline industry.