Edmond de Rothschild Asset Management has identified European smallcaps as a standout investment opportunity for 2025, labelling them “deeply undervalued”.
The firm’s CIO, Benjamin Melman, presented the firm’s outlook for the coming year, highlighting key themes, challenges, and opportunities for global investors during a press conference on Thursday.
Melman warned of the implications of the new American administration’s policies on US equities, particularly inflation expectations. «There’s an elephant in the room, which is going to be inflation expectations,» he noted, citing risks from larger public deficits and inflationary pressures.
While the Trump 2.0 administration’s policies, such as corporate tax cuts, may boost company profits, measures like increased tariffs and mass deportations of undocumented immigrants could harm the economy.
According to Brookings data, GDP growth could drop by 0.1 to 0.4 percentage points in 2025. The IMF adds that a 10 percent increase in tariffs could shave 0.4 to 0.6 percentage points off GDP growth, potentially tipping the economy closer to recession.
Geneva-headquartered Edmond de Rothschild AM anticipates mixed outcomes for the US bond market, assigning a 35 percent probability to a bond rally, a 50 percent likelihood of volatile, trendless rates, and a 15 percent chance of a bear market.
Potential turning point
Despite weak economic growth in the EU and ongoing challenges such as the war in Ukraine, political instability, and sluggish economic momentum, Edmond de Rothschild AM sees potential in European equities. «European equity has been clearly overlooked in a stock market where US exceptionalism dominated,» said Caroline Gauthier, co-head of equities.
With valuation discounts and underperformance relative to the US, European equities could surprise under-exposed investors in 2025. Smallcaps, in particular, are trading at record discount rates and stand to benefit from the European Central Bank’s increasingly accommodative policy stance.
Gauthier also highlighted Germany’s upcoming pro-business government in February 2025 and the possibility of a significant stimulus package, both of which could further bolster the European market.
Europe as potential surpise
“We believe that Europe could be an unexpected surprise for under-exposed investors, given its valuation discounts and its performance lag,” she added. Furthermore, if there’s even slightly better news in Europe, Edmond de Rothschild AM believes it could be enough to shift negative market sentiments.
Opportunities were noted particularly for smallcaps, with record discount rates, which should also benefit from the ECB’s more accommodating policy. Gauthier also pointed out that with Germany’s new government as of February 2025, there could be a more pro-business vision as well as the launch of a strong stimulus which would benefit Europe.
Edmond de Rothschild AM also stated it will stay in the Chinese market, given that “the Chinese authorities now have a plan to bolster the country’s deeply undervalued equity market”. The company also predicts that if household savings there were unlocked, it would be a “gamechanger”, boosting liquidity in its equity markets.
Other themes: AI, corporate hybrid bonds
While Big Data is expected to continue dominating, Melman pointed out that the AI situation is not shaping up as was hoped. “What we’re not seeing today is a reward from the market of companies that are going to be able to take advantage of AI,” he said. “We know corporates which are invested in AI and have the big data will make the difference, and today the market isn’t discriminating enough… this will [become] very important next year.”
Meanwhile, no longer being overweight emerging market bonds, the company has strengthened its exposure to subordinated financial bonds and corporate hybrid bonds, a new asset class in Europe which Melman said is gaining more issuers. It’s a segment the company states is “less reliant on the US and tied instead to the ECB’s eagerly anticipated announcements.”