Since the 2008 global financial crisis and European sovereign debt crisis, Europe has focused on austerity and deleveraging. Fiscal policy has been tight and credit from European banks constrained, suppressing consumption and investment. This has contributed to lower trend GDP and equity valuations with fiscal outlays from 2020–2023 amounting to 20% of GDP — approximately half of that in the U.S.
The consensus view is Europe remains hindered by turmoil in core Germany and France and a trade war with the U.S., given Europe’s economy is highly leveraged to the global industrial cycle.
However, several headwinds that have been weighing on Europe can turn: Real wages are rising across the continent which will support consumption; inflation is falling; the banking sector is healthy; the private sector’s deleveraging is in the rear-view mirror; and German politics could be at a turning point. The collective pressure of Presidents Trump, Xi and Putin could also create pressure on the region to reform and integrate further.
A new dawn for Germany
Germany’s political landscape is shifting. The recent election saw the center-right Christian Democratic Union garner the most votes, with pro-business Friedrich Merz, a former BlackRock executive, poised to take the chancellor position. It was not, however, a decisive victory, though it seems likely the CDU will be able to govern in a two-party coalition with the center-left SPD (Social Democrat Party), as opposed to a more fragile three-party coalition which would intensify the risk of political gridlock.
Initial signs around loosening the purse strings look promising. Chancellor-in-waiting Merz has announced defense and security spending will now be exempt from Germany’s fiscal limits, and an additional €500 billion ($543 billion) infrastructure fund to invest in transportation, energy grids and housing over the next 10 years will be created. This follows almost three decades of underinvestment in Germany’s public infrastructure. This fiscal boost equates to an additional 3% of GDP each year. Even if only part of this spend eventuates, it’s a meaningful shift in attitude. The country, and by extension the continent, can also benefit from a rise in global capex as the West invests in onshoring, de-risking from China and Russia, and the broader energy transition.
With German households in a strong position, (saving 16% of disposable income vs. 13% pre-pandemic), we could see a picture of stronger investment and demand ahead. To an extent this depends on Merz’s political capital, so we will be watching how the final pieces fall over the coming months. Given the range of policy outcomes is unusually wide in the U.S., a case can be made that economic uncertainty in Europe can narrow relative to the U.S.
From crisis to comeback: Can Europe recover?
Admittedly, the outlook in France isn’t as optimistic. Policy instability persists with the far right and far left uniting to destabilize President Macron’s centrist government. The recent appointment of a new prime minister is unlikely to resolve this uncertainty, requiring close monitoring.
By contrast, Europe’s periphery, after enduring years of discipline, is in a markedly improved position. Europe is a cyclical economy that has had structural issues. Winds of change in Germany could see greater spending at a time when the fiscal impulse in the U.S. will decelerate, the ECB is cutting rates, and the continents’ energy costs could dramatically fall as gas exports from the U.S. meaningfully increase.
The growth differential between U.S. and EU equities currently sits at the upper end of its long-term range but the valuation gap is significantly wider than it’s ever been in the last 30 years. The dynamics described above can support consumption, investment and productivity growth in Europe and narrow the growth differential which has not been factored into forecasts or valuations.
Stocks to ride the road to recovery
European stocks remain attractively priced, supported by strong fundamentals and promising growth potential, presenting undervalued investment opportunities.
One such opportunity is Siemens Energy, a leading German energy equipment provider which ended the year on a strong note, driven by booming demand for gas and grid equipment. The profitability of the company is improving after a difficult period in its end markets and idiosyncratic issues in its wind turbine business. Strategic measures implemented across the portfolio, particularly to stabilize its wind operations, have strengthened investor sentiment. Looking ahead, Siemens Energy forecasts annual sales growth of approximately 10% and aims for an operating margin of 10-12% by 2028, reinforcing its long-term growth potential.
The European banking sector also offers pockets of opportunity. Despite regional troubles, Société Générale, France’s fourth-largest bank, posted a 10.5% increase in third-quarter revenue to €6.8 billion, surpassing market expectations. The appointment of a new CFO was well received by investors, further supporting the stock’s positive momentum.
Meanwhile across the channel, NatWest, the second-largest retail bank in the U.K., delivered a 90% return in 2024, as the market gained confidence that net interest revenues would grow in the mid-to-high single digits per annum from 2025 onwards, even in the face of Bank of England rate cuts. This optimism was underpinned by a stabilization in deposit mix and costs, as well as higher asset yields, a tailwind expected to continue through 2027.
Alison Savas, is investment director at Antipodes Partners. She is based in Sydney. This content represents the views of the author. It was submitted and edited under Pensions & Investments guidelines but is not a product of P&I’s editorial team.
