In 2025 European stock indices will outperform their US counterparts

It will be a difficult year for the stock market, with some nasty drawdowns along the way but also opportunities for returns. The ECB will continue cutting rates, while the Fed will do so in the second half of the year.

by Andrea Scauri, manager of the Lemanik High Growth fund

In Italy, the Ftse-Mib index posted a performance of +6.4% in January, driven by the strong showing of the financial sector, the rebound in luxury stocks and several industrial names. Italian mid-small caps, on the other hand, continued to underperform the main index in January as well. We remain positive on this segment, as we believe that the improvement in the macroeconomic backdrop, together with the decline in interest rates, should support a return of investment flows. Global equity markets ended January in positive territory, with European indices outperforming US ones. This trend could continue in the coming months, thanks to improving macro indicators, easier credit conditions and reduced investor positioning. ECB credit data showed a sharp increase in bank lending to corporates in the euro area, especially for longer maturities.

Two main themes caught the market's attention. First, DeepSeek, a Chinese start-up, which launched a chatbot based on the R1-Zero model, developed in just two months with an investment of less than $6 million. That is a significantly lower figure than the investments made by OpenAI, highlighting the potential to develop cheaper models without materially compromising quality relative to the leading competitors. Second, the M&A deals in Italy's financial sector, with BMPS launching a public exchange offer for Mediobanca and Banca Ifis making an offer for Illimity.

On the tariff front, uncertainty remains, with US President Donald Trump announcing a 25% tariff on imports from Canada and Mexico and 10% on China. Trump said he also wants to raise tariffs on Europe, without specifying when or by how much. In the short term, the market will be wondering what Trump's actual tariff strategy is. If he takes a hard line, the impact could be slower global growth, higher inflation and a halt to the Fed's monetary easing policy, with initially negative consequences for equity markets. However, if tariffs are merely a bargaining tool, which is the most likely scenario at present, these effects would not materialise.

Finally, with elections in Germany approaching, the debate over fiscal stimulus is intensifying. We continue to believe that a strong fiscal response from Germany is increasingly necessary in light of the persistent signs of recession emerging from the country.

Technology and capital goods stocks more exposed to investments in AI and data centres came under pressure after the launch of the DeepSeek model, with declines ranging from -6% to -13% for the sector's main players. In many cases, the losses exceeded the gains recorded the previous week following the announcement of the Stargate project, promoted by President Trump together with OpenAI, SoftBank and Oracle, with the aim of developing AI infrastructure in the United States. The project calls for an initial investment of $100 billion, with the ambition of reaching $500 billion over the next four years. The market reaction was also influenced by profit-taking on stocks that had posted impressive growth and are widely held in investors' portfolios.

On the macro front, the United States continues to show steady growth momentum, with the Atlanta Fed's latest Nowcast forecasting annual real GDP growth of +3.2%. In Europe, the composite PMI rose from 49.6 to 50.2 in January, beating consensus expectations of stability, although the data remain weak. Manufacturing is still in deep contraction, while services are growing at a moderate pace, with the index edging down from 51.6 to 51. In Europe, the ECB Governing Council cut interest rates by 25 basis points to 2.75%, highlighting a less pronounced-than-expected economic recovery and an ongoing process of disinflation, thereby confirming its intention to continue monetary easing in 2025. The ECB is expected to cut rates by another 75 bps to 2% by the end of 2025. The Fed, by contrast, left rates unchanged at 4.25-4.5%, adopting a cautious approach to future policy.

The US economy remains solid, supporting the Committee's cautious strategy. Powell highlighted three factors that could influence future Fed decisions:
1) inflation - a sustained improvement in the data is needed before any action is taken,
2) the labour market - currently stable, but a rapid deterioration could prompt easing,
3) fiscal, trade and immigration policies - uncertainty over decisions by the new Trump administration could influence the Fed's stance.
The market is expecting only a total 50 bp cut by the end of 2025, bringing the rate to 3.8%. We believe the most likely scenario is a phase of rate stability over the next few meetings, followed by easing starting in mid-2025.

The commodities market rose in January, with the Bloomberg Commodities Index up 4%, driven by higher gold prices, supported by increased buying from macro funds and physical demand. Oil and natural gas also moved higher.

For 2025, we expect a less exciting year, with smaller gains and high volatility, but still a positive outcome once the next 12 months are over. However, we believe the limited full-year returns could be substantially improved, as we expect some nasty drawdowns along the way. The difference will be made by the path and the timing of the declines and recoveries we can expect. Looking at the S&P in post-election years, there is a clear period of weakness that lasts until March. European markets generally tend to follow the overall performance of the United States, as usual. But it is clear that we have seen extreme sentiment and positioning in favour of US exceptionalism versus Europe. Everyone knows that valuations are cheap, but relative performance has also reached unprecedented levels.

Our asset allocation is well balanced, with the right mix of growth stocks trading at relatively attractive multiples, such as Diasorin and Recordati; commodities-related names with significant untapped value, such as Danieli savings; cyclical stocks with limited downside risk to earnings revisions, such as Stellantis, Brembo and Interpump; and M&A opportunities in banking, such as Banco Bpm, Banca Monte dei Paschi, Mediobanca and Generali. In addition, our positioning in small/mid caps remains focused on a handful of quality/turnaround names. These include Newlat, Fincantieri, Dovalue, Lottomatica and Telecom Italia savings.