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The gloom surrounding investment in Europe following the re-election of Donald Trump as US president is deep, inevitable, depressing and perhaps a little out of place.
Sad connoisseurs of the year-ahead investment outlook season among investment banks and asset managers (okay, I’m guilty of what you accuse me of) know that the consensus right now is indeed overwhelming and reassuringly simple: buy the US. Keep shopping USA. Believe in the story of US exceptionalism. Not only is the US firing on all cylinders, but Europe is also in disarray. It’s very hard to argue against that, and as far as I can tell, few people even try.
The message from the Swiss bank UBS, for example, is that European stocks are likely to go “sideways” in 2025. Take that as encouragement.
Yet the inconvenient truth is that one of the world’s best-performing stock markets since the US election is Germany. No, seriously.
The Dax 40 index has soared in recent weeks, surpassing 20,000 for the first time in history. It’s up 7 percent since U.S. Election Day a month ago (time flies), with a particularly noticeable acceleration since the last days of November. The US market got all the attention, and understandably so, given that the S&P 500 index of US stocks has a market capitalization of $51 trillion, compared to the Dax’s €1.4 trillion. It’s just more important. Still, the post-election surge in the German market is just a shade behind its much larger American cousin and outperforming its European competitors.
What’s going on here? “It’s hard to know exactly why” this is happening, says Gerry Fowler, head of European equity strategy at UBS. But he says it comes down to a few companies in the index.
He’s right, of course. At the top of the list is Siemens Energy, with growth of 35 percent in the past month. Right behind it is Rheinmetall, the arms group, which has risen by 32 percent in the past month. In the next pack, we have the online retailer Zalando, which grew by 29 percent and the auto parts group Continental, by 17 percent.
This is a useful reminder of a few things. One is that when investors decide to avoid a sector as a herd, it doesn’t take much buying to send individual stocks or national indexes soaring.
Fowler points out that across Europe, stocks with strong ties to China have been performing better lately. Some brave investors may have come to the conclusion that things can improve for the Chinese economy after a difficult year, and Europe is a good place to reflect that view.
The second is that immediately after the lavish elections in the USA, Germany itself fell into political hot water. Snap federal elections have been called for February and the debate is heating up over whether Germany should loosen its longstanding resistance to more generous borrowing and fiscal spending. “There is hope that the German election could bring about change,” says Fowler – of the widening deficit and broad corporate strategy, particularly in the key auto sector.
As for margins, there may be other factors at play. France’s loss is Germany’s gain, for example—its political malaise has punished its stocks even more. In addition, talk of American exceptionalism, combined with Trump’s trade tariff plans, has sparked a surge in dollar strength — meaning euro weakness. This is a boon for European exporters and should dampen the effect of additional tariffs. It also increased eurozone government bonds in anticipation of slower growth in the region. Lower bond yields act as a shock absorber by reducing borrowing costs and help support demand for stocks. This may not be enough to protect the entire region from poor performance, but it helps.
The bigger point here is that the “USA good, Europe bad” mantra is a blunt tool. Europe has not given up on the green energy transition – far from it. That underpins demand for some of Germany’s big winners last month. The need for Europe to step up its defense spending game is also evident, especially after the re-election of Trump. This opens up many opportunities for investors who at least hope they know where to find them.
“This is the main thing people need to remember: the European economy and European companies are not the same thing,” Helen Jewell, chief investment officer of BlackRock fundamental equities in Europe, told me this week. “The exceptionalism of the USA does not mean that Europe is terrible. That doesn’t mean people should ignore it. . . People are looking for excuses to invest in the US instead of Europe,” she added.
This is a common refrain among large asset managers, who often say that clients often point to even minor episodes of political instability as a reason to give broad attention to Europe. An outbreak of political calm in Germany and France would be very helpful in terms of persuading local investors to keep funds in the region and attracting foreign funds.
Mix in the faint glimmer of hope that Germany could break with tradition and spend their way out of trouble, and you already have the building blocks for a strong run of select stocks that few expect.
