While things may not look too great for Europe right now — with politics in disarray in certain countries and another year of less-than-inspiring growth — the bloc remains on economists' minds and there is some optimism for the future.
“For Europe, (our) expectations are very low,” said Karen Ward, managing director and chief market strategist for Europe, Middle East and Africa at J.P. Morgan Asset Management. “We’ve had a few years, if not a decade, of underperformance — it’s a very unloved part of the world in investment,” with valuations demonstrating that.
One reason, she said, was that Europe — including the U.K. — hasn’t seen its domestic consumer “come back to life after the (COVID-19) pandemic.” Savers are still cautious on spending, and manufacturing has been weak.
But on the fiscal front, Ward expects the European Central Bank to “move pretty rapidly” in further cutting rates.
“I’ve always said Europe is best in a crisis — often it needs a crisis … to galvanize Europe to take big steps. Maybe we’re underestimating what steps they might take,” Ward said.
Indeed, at its December meeting, the ECB’s governing council voted to cut interest rates by 25 basis points, bringing the main rate down to 3% in its fourth reduction this year.
“Here in Europe, if anything, our problem is we’ve been good global citizens,” with a focus on saving the planet and keeping taxes low for future generations, for example. “We’re so worried about the hangover, we haven’t even gone to the party,” Ward said. “There’s a realization in Europe that maybe we’re missing out — it’s not a sustainable strategy.”
DWS Group’s Martin Moryson, chief economist for Europe, thinks there is potential for U.S. policies in terms of tariffs to be complicated for Europe due to a lack of clarity. “And so you postpone your decisions time after time, postpone investment (and then there’s) less growth in Europe. It’s not the height of the tariff but the uncertainty that leads to less investment,” he said.
Andrew Pease, managing director and chief investment strategist at Russell Investments, also thinks that Europe surprising to the upside is “plausible.”
His starting point — “a strongly held consensus view, which is uncomfortable” — is that Europe has structural headwinds. Germany, in particular, has suffered, posting zero GDP growth since the end of 2019, vs. 11.5% growth in the U.S. and 8% in Netherlands, which he said was a comparable market. “Germany has genuine problems,” he added.
But there is potential. The MSCI European Economic and Monetary Union index is on a 12.5 times multiple, while the U.S. index is on 22 or 23 times — the biggest differential since the eurozone was formed, he said. “Europe is trading on its biggest discount. That’s good,” Pease added.
Melanie Baker, senior economist at Royal London Asset Management, agreed that sentiment around the European economy may have become too downbeat, and cited the upcoming federal election in Germany as a potential turning point. “A political shift in Germany towards reform of the debt brake could boost prospects for European growth, too,” she said.
Japan, India
Japan is a potential bright spot for Tessa Mann, director of macro strategy at Willis Towers Watson.
“We remain constructive on the fundamental outlook in Japan given corporate governance improvements," she said.
India is another potential bright spot, with Robert Lind, chief economist at Capital Group, noting that the country should grow by 6.5% in 2025, "driven by a young workforce and strong domestic spending." It's a continuing growth story, following 8.2% growth in 2023 according to the International Monetary Fund. Capital Group has more than $2.7 trillion in AUM.
Artificial intelligence will also remain a top theme for 2025, said Simona Mocuta, chief economist at State Street Global Advisors. The year will feature “more discussion around the power requirements associated with broad AI deployment,” she said.
The Trump administration’s lighter regulatory approach in the AI arena may also be “beneficial to the economy,” she added.
And Daniel Morris, chief market strategist and co-head of the Investment Insight Centre at BNP Paribas Asset Management, said the firm’s regional preference remains the U.S. — largely due to AI.
“Enthusiasm for artificial intelligence was the primary driver of rising earnings in 2024; the bulk of earnings derived from the types of stocks making up the tech-heavy Nasdaq 100 index, while the rest of the market saw barely positive growth,” he said.
In 2025, “the distribution is expected to be more balanced, even if Nasdaq growth earnings are still superior,” Morris said.