TheChek News Flow

The AI trade that bound the group’s stocks is coming apart, and most now trail the overall market

The Magnificent Seven is now the Mag Five. Or is it the Fab Four? Investors are no longer grouping the market’s big tech stocks together in quite the same way.

The fortunes of what was once Wall Street’s favorite band of megacap names have diverged in the past year, as professional and ordinary investors alike take a more cautious view of the artificial-intelligence spending boom.

Only Alphabet and Nvidia outperformed the S&P 500 in 2025. And so far this year, five Mag Seven stocks are faring worse than the broader benchmarks. Money managers say the moniker—which also includes Microsoft, Meta Platforms, Apple, Amazon.com and Tesla—is no longer synonymous with stock-market stardom.

“The correlation has fallen apart,” said David Bahnsen, chief investment officer at Bahnsen Group. “What they have in common is being trillion-dollar companies.”

It is a sign that the AI trade has evolved since the raging bull market began, with traders now placing their bets more selectively than before. Some expect the benefits of artificial intelligence will spread to industries like healthcare; others are doubling down on the chip makers or the energy companies they expect to power the build-out.

“You’re starting to see it broaden out,” said Michael Hartnett, the Bank of America strategist who is credited with coining the Magnificent Seven moniker back in 2023. The name comes from the classic western movie featuring seven heroic gunfighters and their push to save a small town. “The next Magnificent Seven will be the megacap companies who can show that AI adoption is transforming their huge businesses,” he said.

“Don’t forget that in the film, only a few survive.”

Individual investors, many of whom were loyal Mag Seven shareholders, have also started turning their attention to other parts of the market. These retail investors accounted for a significantly smaller proportion of overall trading volume in those seven stocks last year than they did in 2023 or 2024, according to Vanda Research.

Tesla, a longtime favorite of ordinary investors, has seen the biggest decline in retail activity. Average daily retail turnover dropped 43% in 2025 from the peak in investor interest two years before.

Hartnett said he initially grouped the stocks together based on their shared characteristics as huge, well-run companies that were dominant in the tech sector. But the AI arms race has been driving a wedge between members of the Magnificent Seven for some time.

Amazon, Alphabet, Microsoft and Meta are now the “hyperscalers” spending hundreds of billions to train new AI models, build data centers or expand cloud-computing capacity. Nvidia still dominates the market for the chips needed to power the most advanced AI models.

Meanwhile, the others are lagging behind. Apple shares trailed the S&P 500 index last year, when the iPhone maker faced criticism for spending less and losing ground to competitors on AI efforts. Tesla stock, once a market highflier, has vastly underperformed several of its Magnificent Seven peers as sales of its electric vehicles have slowed.

“They’re all at different stages,” said Michael Arone, chief investment strategist at State Street Investment Management. “The rising tide has lifted all boats, and now we’re going to get to the winners and losers.”

While they might be headed in different directions, each of the Mag Seven still has an outsize influence on the market. Together, they comprise roughly 36% of the S&P 500’s market capitalization, according to Dow Jones Market Data.

Wall Street has left behind a winding trail of nicknames and acronyms that have long since gone out of style.

There was the Nifty Fifty, the group of industry-spanning stocks that gained popularity in the late 1960s. Then there was BRIC, which lumped together the emerging markets of Brazil, Russia, India and China, and WATCH, for retailers Walmart, Amazon, Target, Costco and Home Depot.

That is not to mention BAT (China’s Baidu, Alibaba Group and Tencent), FANG (a Mag Seven predecessor, made up of Facebook, Amazon, Netflix and Google parent Alphabet), FAANG (same group, but with Apple) and Granolas (a group of 11 big European companies, including GSK, Roche and Novo Nordisk).

The Magnificent Seven may have lost the reason investors had linked them in the first place. But for now, no other posse of stocks has come to take their place.

“There is not a suitable replacement yet,” Arone said. “But I think there probably will be.”

Rare Communist conclave plots Vietnam’s course through Trump tariffs

One of the world’s fastest-growing economies is navigating a global trade war

Vietnam’s ruling Communist Party has kicked off its five-yearly conclave to select a new leadership slate for one of the world’s fastest growing economies, as it navigates a global trade war and sweeping domestic reforms. 

The seven-day congress began on Monday in Hanoi, where 1,600 party delegates from across the country will choose a central committee and politburo as well as set key economic targets for the country.

The event comes at a crucial time for export-reliant Vietnam, an Asian manufacturing powerhouse grappling with recently imposed US tariffs of 20 per cent and a rapidly ageing population, while pursuing wide-ranging bureaucratic and economic reforms.

The congress is “a one in five years leadership transition in Vietnam . . . and there will also be some signals about policy changes,” said Nguyen Khac Giang, a visiting fellow at Singapore’s Iseas-Yusof Ishak Institute.

“This year is very crucial, because we have seen so many changes in terms of tariff, in terms of global systems,” he added. “They want to shift the direction of the economy away from the export-led economy into domestic resilience.”

Leading that shift is To Lam, who became the Communist Party chief — Vietnam’s most powerful position — in August 2024 following the death of his predecessor Nguyen Phu Trong. He is now seeking a full five-year term at the congress. 

He launched an overhaul of the bureaucracy last year by merging provinces and trimming the number of ministries and the size of the government. Thousands have lost their jobs in the restructuring. 

On the economic front, Lam launched a plan to make the private sector the country’s “most important force”, with an aim to boost the domestic economy and reduce Vietnam’s reliance on foreign direct investment and, eventually, trade. 

Lam and the ruling party hope these expansive reforms will help Vietnam reach its ambitious goal of becoming a developed country by 2045. Hanoi has also targeted economic growth of 10 per cent this year, following 8 per cent growth in 2025. 

Vietnam has become a critical player in global supply chains in recent years as manufacturers move production there to diversify away from China amid a trade war with the US.

America accounts for nearly a third of Hanoi’s exports. Trump’s tariffs last year, however, has given fresh momentum to the trade-dependent country to look for an alternative economic model. 

“Vietnam needs to add something to its exports, rather than its labour and the utilisation of foreign investment. So it’s looking for a massive and major change across the economy and society,” said Carl Thayer, emeritus professor at the University of New South Wales Canberra and the author of several books on Vietnam.

Thayer said Lam’s policies have broad consensus support in the party, which will discuss and approve socio-economic targets at the congress this week.  

Vietnam has a four-person collective leadership system, which comprises the party chief, president, prime minister and National Assembly chair. Media reports suggest Lam will seek the presidency, along with the party chief post.

Analysts say Lam has already consolidated power in recent years. As public security minister until his ascension to the top job in 2024, he headed the country’s anti-corruption crackdown which some saw as an attempt to consolidate power and neutralise rivals.

The crackdown triggered rare political instability in Vietnam as hundreds of officials, including some from the party’s top leadership, were arrested.  

If Lam does succeed in becoming president, he would have to compromise with the more conservative faction of the Communist Party, said Iseas’ Giang. 

“Either way, I don’t think the collective leadership system in Vietnam will succumb to To Lam’s attempt to consolidate power without any kind of pushback,” he added. 

Some investors would welcome a consolidation of the top four roles.

“Vietnam right now is run as a sort of partnership, and a concentration of roles would give rise more to the notion of a CEO. And that’s perhaps not something that people would find too negative,” said Dominic Scriven, founder and chairman of Dragon Capital, a Vietnam focused asset management firm.

“Uncertainty runs very much against the interests of [Vietnam’s economic] ambitions. So I think there’ll be a big premium on avoiding uncertainty,” Scriven added.

Activist investor urges shareholders to block Japanese conglomerate’s latest proposal

Elliott Management, one of the world’s most prominent activist investors, has urged shareholders to block an attempt by Toyota Motor to take its largest subsidiary private in a ¥5.4tn ($34bn) deal that has become a test case for corporate governance reform in Japan.

Last week, Toyota Motor raised its offer to buy forklift maker Toyota Industries by 15 per cent to ¥18,800 per share from the ¥16,300 proposed last year after being criticised by investors and analysts for undervaluing the business and using opaque valuation methods.

Elliott launched a broadside against the revised offer in a public letter to shareholders on Monday, saying that it does not intend to tender its shares and that it “strongly” encourages other shareholders to take the same position.

“The new price continues to very substantially undervalue Toyota Industries, whose intrinsic net asset value is ¥26,134 per share or almost 40 per cent above the revised [tender] price,” said the US-based fund, which owns more than 5 per cent of Toyota Industries’ stock and is the company’s largest independent shareholder.

“If successful, the revised [takeover bid] would represent a major setback for corporate governance, minority shareholder rights and fair M&A in Japan,” Elliott added.

Toyota Industries share price rose almost 8 per cent last week after the latest offer to trade at ¥19,440 on Monday.

Elliott added that it had “been discussing a standalone plan” with Toyota Industries for several months. The investor said that with its plan, the company could “achieve a valuation of more than ¥40,000 per share by 2028” by unwinding more cross-shareholdings, consolidation initiatives and further governance reforms.

The activist investor is hoping to generate enough leverage to force Toyota Motor to pay more for the company, a top producer of forklifts, equipment used in ports and automotive parts.

“Independent shareholders have the opportunity to determine whether they receive fair value for their investment — either through meaningfully improved transaction terms or through the company pursuing a standalone path,” Elliott said.

But Elliott faces an uphill battle to extract more value from Toyota Motor, according to analysts and other investors.

Toyota will need to acquire two-thirds of the stock to trigger a squeeze out. According to people familiar with the transaction, the car group already has close to 50 per cent of the stock, taking into account cross-shareholdings and companies close to Toyota.

The revised offer for Toyota Industries “can be viewed as reasonably reflective of intrinsic value”, as it is broadly in line with the company’s peak share price in June, said Bernstein in a note, adding that the new offer represents a 42 per cent premium to the level prior to the initial news reports.

“[The] fact that one of Japan’s largest companies has responded positively to engagement from minority shareholders regarding its [takeover bid] terms and conditions is, in our opinion, a sign that the pace of corporate governance reform in Japan could really start to accelerate again from here,” said Bruce Kirk, an analyst at Goldman Sachs.

Here’s how much money the world’s biggest hedge funds made in a recording-breaking 2025

The world's 20 best-performing hedge fund firms delivered a record-breaking $115.8 billion in net gains for clients last year, as industry titans including Citadel, Millennium and Bridgewater Associates once again outgunned smaller rivals.

The landmark haul helped propel the broader $5.2 trillion industry to its biggest-ever annual dollar gain, at a collective $543 billion, according to this year's annual "20 Great Money Managers" ranking, published on Monday by Edmond de Rothschild Capital Holdings.

TCI, Sir Christopher Hohn's $77.1 billion activist fund, delivered $18.9 billion for investors in 2025 — the year's biggest take, and the highest-ever dollar gain by a single manager.

Citadel, the $65.9 billion fund manager led by billionaire Ken Griffin, was named the most successful hedge fund firm of all time for the fourth year in a row. The multi-strategy giant has now delivered $90.4 billion worth of gains after fees for its investors since launching in 1990 — including a $7.4 billion rise last year.

D.E. Shaw, the $72.4 billion quantitative investment powerhouse that uses statistical algorithms and other computer-driven techniques to trade markets, claimed second spot. Since its 1988 launch, the firm has delivered $79.9 billion in net gains for clients, after adding $12.7 billion in 2025.

The research, published annually since 2012, scores the world's 20 best-performing hedge fund firms by all-time net gains since inception.

The industry power ranking also charts firms' annual returns for 2025 and their current assets under management.

Collectively, the top 20 managers' net-of-fees gain of $115.8 billion last year was over $20 billion more than the $93.7 billion they generated in 2024.

Size matters

While the industry as a whole posted its strongest annual return since 2009, the data reinforces the advantage of scale.

Despite accounting for just 16.6% of total global hedge fund assets, these 20 firms produced over 39% of all industry-wide gains in 2025, underlining how the largest firms continue to dominate performance and profits. The weighted average return of the top 20 managers reached 15.7% in 2025, comfortably ahead of the broader industry's 12.6% gain, as measured by Hedge Fund Research's Fund Weighted Composite Index.

"A combination of record high assets under management, strong equity and bond markets, and sizeable macro trading opportunities all contributed to this strong performance," said Rick Sopher, senior advisor at Edmond de Rothschild.

Bridgewater Associates and Millennium traded positions in this year's rankings, taking third and fourth place, respectively.

Bridgewater climbed to third thanks to a $15.6 billion gain in 2025 — more than double Millennium's annual gain — lifting its all-time net gains to $79.1 billion. Founded by Ray Dalio in 1975, Bridgewater currently manages $76.9 billion in assets.

Multi-manager pioneer Millennium slipped one spot to fourth. But the firm, founded by Israel "Izzy" Englander in 1989, is now ranked the world's largest hedge fund firm by assets, with $85 billion under management.

The company — whose model is built around a so-called "pod shop" approach, comprising dozens of semi-autonomous portfolio managers and trading teams running various investment strategies — has generated $73.4 billion in net gains since inception. It added $7.9 billion last year.

'Shrewd business instinct'

Meanwhile, London-headquartered TCI ranked fifth, up from 14th place in just three years. The firm led a cluster of U.K. managers that also included Brevan Howard Asset Management, the macro trading firm co-founded by Alan Howard, as well as Egerton Capital and Marshall Wace.

"The gains made by TCI continue to be quite remarkable; over the past three years TCI has made $40 billion net of fees for investors," said Sopher.

Elliott Management, the activist hedge fund launched by Paul Singer in 1977, made $5.7 billion last year, bringing its total assets to $80 billion. Its all-time gain of $59.5 billion since launch helped it secure sixth place.

In total, the top 20 hedge fund firms have now generated $926.5 billion in net gains for investors since inception. The broader hedge fund industry's cumulative net gain has climbed to $2.37 trillion, boosted by 2025's landmark $543 billion advance, according to the estimates.

"Remarkably, there were no new entries into the top 20, and relatively little movement among the leaders, reflecting perhaps the persistence and dominance of the top firms," Sopher said.

"Most of the top 20 are run by managers with a shrewd business instinct who have proven over decades that they can make money for investors."

Europe’s AI ambitions are running into a markets plumbing problem

The region lacks the depth of long-dated investment capital needed to fund required energy infrastructure

Europe’s ambitions to build out artificial intelligence, data centre and energy infrastructure are colliding with an awkward — and familiar — financing reality: the continent lacks the depth of long-dated investment capital needed to fund them.

The challenge is formidable. Europe may need to invest €3tn over the next five years in digital and energy infrastructure, according to EU estimates — and before defence and national security. Meeting that demand will require funding from every corner of the financial system: public markets, banks, governments and private capital.

The base case is uncomfortable: Europe’s gap relative to the US continues to widen. But a trio of developments — a pivot by private credit firms, regulatory recalibration and renewed international investor interest — could help shift the balance in favour of investors financing hard assets. For instance, there was a 40 per cent rise in private credit fundraising in the region last year, according to Preqin.

Europe’s difficulty is not a lack of savings. The failure is in financial plumbing, bureaucratic regulation and risk appetite. Europe’s banks are in their strongest shape in decades yet remain ill suited to finance assets with very long duration. Meanwhile European insurers are hemmed in by regulation. Securitisation markets remain anaemic. Bond markets and project finance can do a lot, but they can only go so far.

Nowhere is the financing problem clearer than the securitisation market which is a natural home for data centre funding. Europe’s pipes are badly clogged. Since 2018, securitisation of US data centre debt has totalled $63.6bn, according to JPMorgan — $27bn of that in 2025. The EU has managed just $0.8bn. Investors expect data centres to be the largest source of issuance in US markets in 2026. Meanwhile Europe has barely begun. 

If Europe cannot fund even these strategic assets at scale, it is hard to see how it can keep pace more broadly. A key part of the problem is that insurers — the natural buyers of senior securitised tranches — have been straitjacketed by Solvency II capital rules which came into effect in 2016. European life insurers currently hold just 0.4 per cent of their portfolios in securitisations, compared with 17 per cent for their US peers. While well intentioned, the unintended consequence of Solvency II is Europe’s largest pool of patient capital is severely curtailed.

There are tentative signs of regulatory movement. Brussels is reviewing aspects of securitisation and insurance rules, and several member states are pushing for more flexibility to finance energy transition and digital assets. None of this is yet settled, and the current proposals still fall short of what the scale of Europe’s capital expenditure challenge demands. But as the penny drops about the magnitude of the investment gap, the pressure to go further is likely to intensify.

The scale of infrastructure financing will call for private credit to be part of the solution. Leading private credit firms were already pivoting away from mid-market and buyout loans towards financing the kind of hard assets needed for data centres, grid upgrades or renewable energy. US insurers, seeking long-dated, steady returns, are a driver of this development.

This is accelerating a quiet reshaping of Europe’s infrastructure funding model. Banks and private credit funds are starting to partner to originate and syndicate risk. Expect these collaborations to multiply as balance sheet constraints bite and investors search for yield with duration.

Banks will also look to recycle their capital to unlock lending capacity beyond infrastructure. Asset-backed lending is a €5tn market in Europe, with more than three-quarters of it held on bank balance sheets, according to Oliver Wyman estimates. Some of these assets fit well in investors’ portfolios. 

None of this will be risk-free. It is hard to imagine Europe deploying several trillion of capital without some mishaps. But policymakers need to be clear headed that if the exposures are broadly diversified among investors, it will be far less risky than if concentrated just on bank’s balance sheets. Alternatively, failing to fund the investment will hold back Europe’s growth. As Ana Botín recently argued in the Financial Times, “low growth is now Europe’s biggest financial-stability risk”.

Europe cannot deliver on its AI, energy and industrial ambitions without deeper and more robust capital markets. For investors able to supply long-dated capital, the prize lies in financing, and earning durable returns from, the overhaul of Europe’s financial plumbing.

UK should relax EV targets to support auto sector says report

More investment in car production would help boost domestic battery manufacturing

The UK should relax its targets for the phaseout of polluting cars in order to better support the domestic automotive and battery industries, according to a report on how to attract investment in gigafactories.

The UK’s zero-emission vehicle (ZEV) mandate requires 80 per cent of new cars sold in 2030 to be non-polluting electric vehicles, rising to 100 per cent by 2035. 

That should be relaxed to 50-60 per cent in 2030, with penalties for non-compliance by carmakers also reduced, to encourage investment and reduce the risk of production moving offshore, according to the Policy Commission on Gigafactories, a report on how to boost the UK’s battery supply chain. 

“There is growing consensus in industry that there’s a need for a course redirection here. It’s not scrap everything, but recalibrate,” former Labour defence secretary Lord John Hutton, who launched the commission last year, told the FT.

Such changes would not “detract from the overall direction of travel”, he said, adding that “regulatory interventions have to be evidence based, not ideologically based”.

The government last year watered down the ZEV mandate legislation by lowering the fines paid by carmakers for missing sales targets. It also said in December it would begin a review of the targets this year in response to pressure from industry.

The gigafactory commission has spent months probing what is holding back the UK’s battery manufacturing industry. While independent of government, the Department for Business and Trade participated as an observer in commission meetings.

The long document, which will be published on Wednesday, makes a raft of recommendations and warns that the UK must move strategically to develop a domestic battery supply chain or risk a “sharp erosion of its automotive base”.

“This is technology fundamental to the future of UK manufacturing,” said Hutton. “A business-as-usual approach isn’t really going to cut it . . . We have to revitalise our approach.”

The UK does not have any large-scale independent battery manufacturers, following the dramatic collapse of Britishvolt in 2023. Policymakers and analysts have stressed the need for a homegrown battery champion. 

AESC, which is owned by China’s Envision and supplies Nissan’s UK car plant, recently started production at its new gigafactory in Sunderland. Meanwhile Tata, the Indian owner of Jaguar Land Rover, is developing a battery factory in the UK with AESC’s involvement.

Think-tank IPPR warned on Friday that 90,000 UK jobs in the automotive and battery sectors would be at risk if the country’s China-dominated supply chain were materially disrupted. China has shown a willingness to weaponise its dominance over minerals supply chains in recent months by cutting off supplies of key materials, including rare earth elements. 

Hutton’s report says that, in order to ensure there is sufficient demand for a new gigafactory, the government should work on attracting a major global company to make EVs in the UK, with a cabinet minister given responsibility for the task. 

The government is trying to convince new entrants from China, and Hutton said his commission was “open to the idea that the potential [carmaker] in the UK might be Chinese”, given their leadership in EV technology. 

But manufacturers have pointed to high domestic energy costs as a barrier to producing the EVs in the UK.

Carmakers have also argued that the current ZEV targets are out of step with consumer demand and that penalties for non-compliance deter investment.

Despite a sharp rise in sales, EVs represented 23 per cent of the new car market in 2025, falling below the government’s goal of 28 per cent.

The commission’s report also stressed the importance of attracting a producer of cathode active materials (CAM) to the UK — a critical part of the battery supply chain, produced from mined material such as nickel.  

China controls more than 80 per cent of the CAM market, having rapidly built out manufacturing capacity, according to S&P Global Mobility. In 2024, miner Eramet said it would halt plans to develop a battery recycling plant in France because of the lack of battery factories and cathode production in Europe.  

“Our commitment to transition to zero emission vehicles by 2035 is giving industry the certainty it needs,” said a government spokesperson, adding that it had committed £4bn to the battery sector via its industrial strategy.

Berlin’s fiscal stimulus will have far-reaching effects

Germany’s closely followed Ifo index of business sentiment fell to its lowest level at the end of 2025 since the spring. “The year is ending without any sense of optimism,” the Ifo institute noted succinctly. 

But to some economists, this feeling of gloom in the Eurozone’s largest economy is misplaced — at least, in part. Not only did the single currency zone prove more economically resilient than expected in 2025, but additional growth drivers are also poised to kick in over the coming 12 months, which have the potential to lift the outlook. 

The key one is the impact of German fiscal policy. The country is set to inject stimulus into the economy even as the benefits of European Central Bank interest rate cuts continue to feed through. Falling inflation and ongoing real-terms household income growth should support the outlook, analysts add. 

“We expect growth to accelerate in the course of this year,” says economist Bert Colijn at ING bank. 

The global environment will remain challenging because of competition from China, US trade tensions and a strong euro, he says, but there is an optimistic economic case resting on domestic factors.

Cautious optimism about the Eurozone lifted some of the region’s key equity indices in 2025 — including the German Dax index of 40 blue-chip companies, which rose 23 per cent vs the S&P 500’s 18 per cent.

Forecasts from the ECB released just before the end-of-year break pointed to a solid growth performance in the coming two years. Growth in Eurozone GDP is predicted to be 1.2 per cent in 2026 and 1.4 per cent in 2027 and 2028 — similar to last year’s expansion. 

Business investment will rise in 2026-2028, the ECB forecasts, borne higher by increasing profit growth and relatively low interest rates. 

The biggest shift comes down to budget policy, which is expected to be stimulative overall because of the decision by the government of Chancellor Friedrich Merz to loosen its self-imposed budgetary strictures and invest in defence and infrastructure. 

The German budget deficit is set to widen from 3.1 per cent of GDP in 2025 to 4 per cent in 2026, according to European Commission projections.

More public spending in the region’s biggest economy will have knock-on effects for businesses and consumers elsewhere in the currency zone. The peak of the impact on the single currency area will be felt in 2026, the ECB projections suggest, with an overall Eurozone fiscal loosening of 0.3 percentage points. This comes even as some Euro area countries make efforts to rein in public debt — among them France and Italy.

Household sentiment remains subdued, with a European Commission index of optimism dipping in December and still hovering below pre-pandemic levels. The household savings ratio remains high at over 15 per cent of disposable income. 

But unemployment is still near record lows, real wages are growing, and lending growth is up, points out Claus Vistesen at Pantheon Macroeconomics. “We think Eurozone households’ spending will continue to grow modestly in coming quarters.” 

At the same time, growth threats remain manifold. Among them are the risk of fresh political tensions with the US, and the war between Russia and Ukraine. 

A renewed Chinese push for export growth poses particularly acute challenges for German GDP, Goldman Sachs analysts warn, with slightly less pronounced effects for Italy, France and Spain. 

As a recent global FT survey showed, economists expect the US to extend its productivity lead over Europe thanks to AI investments. Meanwhile progress on deepening the EU single market and bolstering the region’s economic dynamism is patchy. 

And while Germany may have space for a €1tn debt-funded spending drive on infrastructure and defence, the economy’s overall performance remains tepid. The Bundesbank in December lowered its 2026 German growth forecast by 0.1 percentage points to 0.6 per cent, while raising its 2027 prediction by the same amount to 1.3 per cent.

Nevertheless lower energy costs should help the region’s manufacturing powerhouses, and inflation now appears to have been decisively quelled, leading to ECB predictions that policy is in a “good place”. It forecasts annual inflation of 1.9 per cent in 2026.

Then on top of that comes the fiscal policy shift in its biggest economy. 

“The biggest factor that makes 2026 better is that we will likely see a private sector response to the German fiscal stimulus — consumers and businesses feeling better and spending more money,” says Holger Schmieding at Berenberg Bank.

Low interest rates will have even more far-reaching effects across the Eurozone, stimulating investment and residential construction, he adds. “It is not just a German fiscal story.”

How Italy's Non-Dom Regime is Reshaping European Capital Flows and Valuations

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KEY HEADLINE DRIVERS

• FTSE MIB +31.5% YTD in 2025 – outpacing DAX (+39% total return), CAC 40 (+10.4%), FTSE 100 (+21.5%); Italy's top European performer amid continent-wide 5% FDI decline

• ~3,900 high-net-worth individuals registered under Italy's flat tax regime through 2023, with acceleration post-August 2024 (€100k→€200k doubling) and UK non-dom abolition (April 2025)

• FDI projects +5% in 2024 – only major European market growing; France -14%, Germany -17%, UK -13%; Italy 3rd fastest EU growth (Spain +15%, Poland +13%)

• €120M Tech Europe Foundation funding (Milan venture platform) targeting €1B by 2030 in AI/life sciences; IRIS Capital Israeli equity partnership (March 31 deal closure target)

• Unemployment 6.0% (March 2025, lowest since pre-2008); employment +1.3% in 2025 (exceeds GDP growth); real wages +2.9% projected – structural labor market inflection

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THE CATALYST: ITALY'S NON-DOM FLAT TAX TRANSFORMATION

Italy's flat tax regime for HNWIs launched at €100,000 annually in 2017. The inflection point: August 2024 doubling to €200,000 (€300,000 for 2026 entrants), coinciding with UK non-dom regime termination effective April 2025.

The regime's structural appeal: all foreign-sourced income, capital gains, and dividends taxed at single €200,000 payment. Compare to progressive rates exceeding 43% on Italian-sourced income. Adds: exemptions on foreign real estate wealth tax, foreign financial asset reporting, inheritance taxes on non-Italian assets for 15 years.

For global wealth seeking tax efficiency within G7 framework, Italy's combination of legitimate tax relief, stable governance, cultural capital (Milan luxury goods ecosystem), and EU membership represents arbitrage unmatched since Portugal's NHR watering-down and Dubai's new corporate tax.

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FOREIGN DIRECT INVESTMENT: COUNTER-CYCLICAL MOMENTUM

Europe faced 5% FDI decline in 2024 (manufacturing down 9%, geopolitical uncertainty, tariff concerns). Italy diverged sharply.

PROJECT FLOWS (EY Attractiveness Index 2024):

- Italy: 224 projects (+5% YoY) – 3rd fastest growing

- France: 1,025 projects (-14%)

- Germany: 608 projects (-17%)

- Spain: 351 projects (+15%, fastest)

- Poland: 259 projects (+13%, 2nd)

- UK: 850 projects (-13%)

CAPITAL STOCK (UNCTAD 2024):

Italy inward FDI stock: $493.5B. Largest sources: France 22.4%, US 10.1%, Germany 9.5%, Netherlands 6.6%, UK 6.4%.

2024 FDI inflows: €24.7B (down from €32.6B in 2023, but modest vs European decline). Sectoral shift: financial services up notably, tech funding accelerating.

Interpretation: +5% project growth in contracting European environment signals capital reorientation toward Italy's underexploited financial services, tech, and defense sectors.

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EQUITY MARKET OUTPERFORMANCE: STRUCTURAL AND CYCLICAL FACTORS

FTSE MIB's 31.5% YTD return reflects mean-reversion plus genuine fundamentals:

VALUATION COMPRESSION:

Italy: 9.0x forward 2025 P/E (cheapest major European market)

France: 12.5x

Germany: 12.0x

UK: 12.3x

This gap persists despite Italy's +5% FDI growth and +31.5% equity performance – signaling institutional underweight being corrected by non-dom capital inflows and NRRP-driven capital.

SECTORAL DRIVERS:

Banking (30% of FTSE MIB): surged on deposit flows, commercial lending strength

Insurance (14%): beneficiary of wealth concentration

Utilities: domestic-facing, sheltered from tariff risk

KEY GAINERS 2025:

- Fincantieri (+140%): shipbuilding demand, backlog €61.1B (9M 2025, +32% vs YE 2024); 100 ships, deliveries through 2036

- Leonardo (+90%): NATO defense spending surge

- Iveco Group (+98%): Tata acquisition, restructuring optionality

- Telecom Italia (high double digits): European telecom recovery, reduced leverage

- Banking stocks broadly: deposit inflows from new residents

EARNINGS SURPRISE DIFFERENTIAL:

Unlike Germany (DAX +28% almost entirely driven by SAP +72% on AI hype, underlying weakness), Italy's gains broad-based. Banking concentration gave Italy structural exposure to deposit inflows from new resident arrivals – direct capital flow multiplier other European markets lack.

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ECONOMIC FUNDAMENTALS: CYCLICAL RECOVERY + STRUCTURAL REFORMS

Macro backdrop constrained (0.4-0.6% growth 2025 est.) but trajectory improving and differentials tightening.

REAL GDP GROWTH:

2024: +0.7% (matched/exceeded eurozone average; broke historical underperformance pattern)

2025E: +0.5-0.6% (weak Q2, stabilizing Q3-Q4; tariff headwinds offset by RRF deployment)

2026E: +0.7-0.8% (NRRP-driven investment acceleration)

LABOR MARKET STRENGTH (STRUCTURAL SUCCESS):

Unemployment: 6.0% March 2025 (lowest since pre-2008; down from 7.5% in 2023)

Employment growth: +1.3% in 2025 (above GDP growth – productivity gains)

Vacancy rate: stable 1.8% through 2025, positive forward expectations

Wage growth: +2.9% in 2025, +2.4% in 2026 (real wage recovery underway)

This marks genuine shift. Italian employment in secular decline for years; now expanding faster than GDP. Either productivity gains or labor market normalization post-austerity – either way, household income growth supports consumption resilience 2025-26.

INFLATION & MONETARY NORMALIZATION:

2024: 1.0% (below ECB 2% target)

2025E: 1.7% (energy-driven, moderating)

2026E: 1.4% (normalized, ECB accommodation window extended)

Low inflation gives Italy pricing power and ECB rate-cut tailwinds through 2026 – boost for equity valuations and housing investment.

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THE CAPITAL INFLOW MULTIPLIER: WEALTH, DEPOSITS, REAL ASSETS

Non-dom policy creates virtuous cycle equity markets often underestimate:

DIRECT: ~€800M+ annually from 3,900+ registered HNWIs (conservative estimate)

INDIRECT MULTIPLIER EFFECTS:

- New residents purchase/rent luxury property → real estate recovery + construction jobs

- Private school, healthcare spending → services expansion

- Wealth management inflows to Italian banks → deposit base strengthening

- Luxury consumption (Hermès, Ferrari, Gucci shifts as resident base expands) → luxury brand support

CAPITAL MARKET IMPACTS:

- New residents establish investment accounts with Italian intermediaries

- Institutional capital follows wealth flows (family offices, private banks deploy)

- Banking sector deposit ratios improve → lending capacity + NIM expansion

This multiplier visible in banking sector data (M&A consolidation, deposit market share shifts) but not yet fully priced into valuations.

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TECH ECOSYSTEM ACCELERATION: IRIS CAPITAL & TECH EUROPE FOUNDATION

€120M Tech Europe Foundation funding (Pignataro-backed, Milan-based) with €1B target by 2030 signals institutional venture recognition of Italy:

- Portfolio focus: AI, life sciences, deep tech

- Geographic advantage: Milan nexus (stronger than Rome, competitive with Berlin)

- Capital availability: NRRP green transition funding + equity capital

- Merger with university incubators: 70+ startups consolidated; index-level venture returns potential

IRIS Capital partnership for Israeli market equity financing with March 31 deal closure represents early exposure to this capital flow trend – Italian VC allocations likely outperform other European PE/VC baskets in 2025-26 as capital concentration and government support accelerate.

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VALUATION ARBITRAGE & MOMENTUM SETUP

Italy France Germany UK

2025 Forward P/E 9.0x 12.5x 12.0x 12.3x

FTSE MIB YTD 2025 +31.5% +10.4% +39% ETF* +21.5%

FDI Growth (2024) +5% -14% -17% -13%

Unemployment (2025) 6.0% 7.5% ~3.8% ~3.9%

GDP 2024 +0.7% +0.9% +0.3% +1.0%

*DAX ETF (total return w/ dividends) +39%; price-only index approximately +23%

Italy remains cheap on earnings but increasingly expensive on momentum – typical of institutional re-rating phase. Divergence between valuation (cheapest) and FDI flows (+5% growth) + equity performance (+31.5% vs DAX +23% price) suggests:

1. Institutional underweight is correction-resistant: flows from HNWIs and NRRP-driven capital offset macro skepticism

2. Domestic capital cycle turning: employment recovery + deposit inflows + wealth tax exemptions create self-reinforcing equity bid

3. Momentum has legs: until Italian multiples normalize to 11-12x (still discount to France), equity flows likely persist

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INVESTMENT IMPLICATIONS & THESIS SUMMARY

FOR MULTI-STRATEGY ALLOCATORS:

- Overweight small-to-mid cap Italian cyclicals (banks, construction, luxury goods) – direct beneficiaries of non-dom multiplier effects

- Underweight high-multiple industrials vulnerable to US tariff escalation (auto, appliances) – Italy exposure ~12% of exports

- Relative value: Long FTSE MIB vs short CAC 40 or DAX on valuation mean reversion + structural divergence

FOR PE/VC:

- Italian deal flow quality improving with NRRP deployment; venture sector (Tech Europe Foundation) entering institutional phase

- Real estate (residential + commercial) offers tax-advantaged entry for new resident capital – co-investment with family offices

- Debt opportunities: Italian bank capitalization improving; mid-market lending spreads attractive vs Northern Europe

FOR PMs MONITORING TAX POLICY:

- Non-dom regime codified, not promotional – 15-year framework with progressive rate increases suggest long-term government commitment

- Succession planning: IRIS Capital deal, Fincantieri/Leonardo wins, tech venture consolidation point to 18-24 month execution window for new allocations

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CATALYSTS & TIMELINE

IMMEDIATE (Q1 2026):

- IRIS Capital first deal closure (March 31 target) – validates Israeli/Italian capital flow thesis

- Meloni government budget finalization – confirms NRRP spending acceleration through 2026

- ECB rate decision: likely two 25bp cuts through June → equity multiple re-rating

MEDIUM-TERM (H2 2026):

- Bank earnings expansion on deposit margin + lending volume

- Tech venture exits from Tech Europe Foundation portfolio (earlier cohorts)

- Construction/real estate cycle recovery visible in permits, starts data

- Non-dom resident count likely crossing 5,000+ (1.25x+ increase from current run rate)

TAIL RISK:

- US tariff escalation on EU goods (Italy exposed ~10%+ of exports)

- ECB policy divergence (hawkishness vs market expectations)

- Geopolitical escalation (NATO exposure, defense budget shifts)

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CONCLUSION: THE CONFLUENCE TRADE

Italy represents rare confluence of tax policy innovation, capital inflows, sectoral positioning, and valuation arbitrage. Non-dom regime neither new nor promotional – codified, permanent, increasingly attractive as global alternatives (UK, Portugal) disappeared or weakened.

Unlike Spain's FDI surge (primarily EU grants, energy), Italy's inflows reflect private capital allocation – more durable signal. Combined with structural labor market improvement, NRRP spending acceleration through 2026, and banking sector deposit inflows, conditions set for sustained equity re-rating from current valuations.

FTSE MIB's +31.5% outperformance in 2025 not a bubble – reflects genuine capital flows and earnings revisions finally catching up to policy reform. For allocators underexposed to Italy, setup in H1 2026 (post-IRIS Capital deal, pre-tariff escalation uncertainty) offers narrow window to establish positions before multiples normalize and foreign investor allocation increases.

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