Europe’s Economy Is Looking Up. Where to Find Bargain Stocks.
Europe looks like the global economic sick man right now.
Governments have collapsed in both continental big powers, Germany and France. Returning U.S. President Donald Trump threatens to impose massive tariffs to trim a $175 billion trade deficit with the European Union, and to leave Europe on its own to support Ukraine and contain an aggressive Russia. China is dominating green technologies that Europe pioneered and eating the continent’s lunch on electric vehicles.
Investors have noticed. The iShares MSCI Eurozone exchange-traded fund has slipped by 2% over the past six months, while the S&P 500 gained 12%.
Next year could be better, though, throwing up bargains in some underperforming stocks. “The picture is brightening a little bit now,” says Mathieu Savary, chief strategist for Europe at BCA Research.
Markets look hopefully toward Germany’s election in February, expected to bring Christian Democratic leader Friedrich Merz to power in place of Olaf Scholz. Merz will likely unleash budgetary stimulus, which parsimonious Germany can uniquely afford, says Eoin Drea, senior researcher at the Wilfried Martens Centre for European Studies. “With debt to GDP [gross domestic product] at 64%, Germany can easily invest 1% to 2% per annum on infrastructure,” he argues. The country’s constitutional “debt brake” affords “all sorts of wiggle room,” he adds.
Andrew Clifton, an equities portfolio specialist at T. Rowe Price, finds an assortment of German companies worth the current price: engineering conglomerate Siemens, financial services powerhouse Allianz, IT giant SAP, and publisher Springer Nature, which held an initial public offering in October. European stocks as a whole are 20% cheaper than U.S. peers, even excluding the “magnificent seven” of outperforming U.S. tech giants, he figures.
Europe will get to Yes with Trump on trade, avoiding his threatened 10% universal tariff, Savary predicts. The continent can contract with U.S. exporters to supply its burgeoning liquefied natural gas demand, bolstering Trump’s goal of increased petroleum production. Most of the cash from increasing European defense budgets will pour into U.S. arms suppliers.
What trans-Atlantic talks can’t achieve, a depreciating euro might. The common currency has fallen from $1.11 to $1.05 since Oct. 1. Analysts expect parity by early next year as the hot U.S. economy and markets keep sucking in capital.
That will keep exports competitive and boost profits for European manufacturers, who earn most of their revenue outside the EU. “The euro at parity could be an actual positive for European equities,” says Michael Field, European equity strategist at Morningstar.
The worst looks to be over for the euro- zone’s domestic economy, too. From near-recession in 2023, the European Central Bank predicts 1% growth next year. Dwindling inflation will enable the ECB to cut interest rates by another percentage point to 2%, economists predict. “Macroeconomically we are in a much better place than last year,” Morningstar’s Field says.
There is one big black cloud on Europe’s horizon: France. Unlike Germany, Europe’s No. 2 economy needs to cut debt—now at 100% of gross domestic product with a budget gap of 6%—and lacks a clear path out of political stalemate. A fractured parliament ousted Prime Minister Michel Barnier with a no-confidence vote on Dec. 4. Late Friday, Moody’s downgraded France’s credit rating to Aa3 from Aa2.
“Europe needs a functioning German-French axis,” says Carsten Brzeski, global head of macro at ING Research. All the same, next year “could see some seeds planted for more growth and strategic autonomy,” he thinks.
That could be enough to lift some of those lagging stocks.