Europe’s equity market is increasingly viewed as a neglected corner of global investing—overshadowed, overlooked, and unloved.
Vincent Mortier, group chief investment officer at Amundi, summed it up: “Europe has become like China, a kind of forgotten investment case, an unloved investment case. We don’t see much traction from non-European or euro-based investors.”
In Frankfurt, Vincenzo Vedda, global CIO at DWS, echoed this sentiment: “Given what is happening in the US, you have this vacuum cleaner effect, almost sucking all the capital globally into the US. With all the uncertainty, it’s probably unwise to be overweight European equities.”
While the market remains out of favour, there’s reluctance to write Europe off completely. Amundi points to two potential catalysts in 2025, while DWS underscores the importance of a global economic upswing.
Fiscal reset in Germany?
The first major event to watch is Germany’s federal election in February, followed by the formation of a potential new government in April.
“We might see Germany revisiting and agreeing on an expansion agenda, including fiscal spending and loosening its fiscal framework. That could be a game changer because Germany has been stagnant,” Mortier said during Amundi’s 2025 investment outlook presentation.
A shift in German fiscal policy could transform not only its domestic economy but also Europe’s broader investment appeal. “If Germany changes course, it could have a very big effect for Europe at large,” Mortier added.
The second potential catalyst is peace in Ukraine. While not imminent, its impact could be profound. “We are not there yet, but it would be unfortunate to give up on Europe now,” Mortier noted.
Bonds: a stabilising force
Amid equity market challenges, Europe’s bond market is offering stability. Mortier, known for his 2022 “Bonds are back” call, highlighted the appeal of positive real rates. “For years, real rates were deeply negative—a kind of tax on savings. That has changed,” he said. “Even the safest bonds now more than cover inflation. The investment case for fixed income is fully back.”
He noted strong domestic demand for bonds: “Italians are buying BTPs, Spaniards Bonos, and the French OATs, but also cross-border”. However, he cautioned investors not to expect super-high returns. For that, they need to move into equities or other asset classes.
Bonds are also evolving within portfolios. Monica Defend, head of research at Amundi, remarked: “Next year, bonds, including euro and peripheral bonds, will remain important—not just for performance but as diversification drivers. They are changing shape within asset allocation.”
Equities: cyclicality and the discount
Despite trading at a significant discount to the S&P500, Europe’s equity markets struggle to gain relevance. “You have a 45 percent discount in Europe versus the S&P. That’s a big opportunity,” Vedda observed.
A stronger global economy is key to reviving European equities. “Global investors only turn to Europe when they expect a global cyclical upswing. European indices inherently have more cyclicality, so you need a better global economic picture to attract a broader investor base.”
Cyclicality reflects the dominance of industries like manufacturing, industrials, and commodities in European indices, which thrive during periods of global economic expansion. Vedda noted that Europe’s unusually long but shallow Purchasing Managers’ Index (PMI) downcycle could be nearing an end, offering potential relief. “Equities usually react positively when those indices turn upwards,” he said.
European banks: a bright spot?
Vedda sees European banks as a standout opportunity, countering market fears of significant earnings cuts. DWS forecasts modest growth and increased shareholder returns in 2025. “We see more cashbacks from European banks next year in terms of dividends and buybacks. If leading indicators improve, banks usually perform well. There’s a very good risk-reward here.”
The cautious tone surrounding European markets persists, but there is hope for a revival. “You need more confidence in the global market for investors to fully embrace the trade,” Vedda said. He added that the second half of 2025 could bring the long-awaited economic momentum.
Until then, Europe’s “forgotten” status may linger a little longer.