Expansionary monetary policies: the ECB has more fuel than the Fed. Positive on European equities

The ECB has more room for manoeuvre than the Fed to adopt an accommodative policy. Germany’s €500 billion plan is expected to have significant effects from 2026 onwards.

by Andrea Scauri, manager of the Lemanik High Growth equity fund*

In Europe, the backdrop looks particularly favourable. The ECB has more room for manoeuvre than the Fed to adopt an accommodative policy, and Germany’s €500 billion plan promises significant effects from 2026 onwards. Valuations remain attractive, especially in a scenario of earnings recovery. For these reasons, we maintain a constructive view on equity markets, while keeping some cash on hand to seize tactical opportunities in the event of fresh corrections.

Global equity markets ended May with strong gains, quickly recovering the losses recorded after Liberation Day. The rebound, both in speed and in intensity, was reminiscent of the post-Covid rally, driven by a combination of favourable macroeconomic and geopolitical factors. The main catalyst was the announcement of a 90-day trade truce between the United States and China (with reciprocal tariff cuts to 30% on Chinese products and 10% on US products), which marked a shift in Trump’s trade policy: less ideology, more pragmatism in negotiations. This easing of tensions helped reduce the probability of a recession in the United States from 50-60% to 30-40%.

On the macroeconomic front, "hard data" remain solid, while "soft data" should improve, supported by the recovery in risky assets and a calmer backdrop. Further underpinning market sentiment was a ruling by the United States Court of International Trade, which found that the Trump administration had exceeded its legal powers in imposing most of the tariffs, stating that the IEEPA (International Emergency Economic Powers Act) does not allow unlimited tariffs. The decision specifically concerns the 10%, 25% and 20% tariffs on various trading partners, but excludes those on steel, aluminium and automobiles. The ruling could also complicate the administration’s fiscal plan, which relied on tariffs as a source of revenue. If upheld, alternative tariff tools such as Section 232 could still be used, but the negotiating position with trading partners would be further weakened.

Italian equity markets continued to outperform other indices, thanks to the strong performance of the financial sector (banking index +8%) and the sharp rebound in several key mid-small cap stocks (including Fincantieri +36%, Technoprobe +21%, Danieli +20%, which are key holdings in our portfolio). All this took place in a favourable environment for the bond market, with the BTP-Bund spread falling below 100 basis points. At the same time, in recent weeks attention has also focused on interest rates and US public debt. In the United States, yields accelerated in May (+25 basis points to 4.4%) because of concerns over fiscal sustainability, fuelled by a new tax law that extends tax cuts and raises the debt ceiling by $4,000 billion. The proposal has so far been narrowly approved by the House and still needs Senate approval, where some amendments are expected. The Congressional Budget Office estimates that the law would add another $3.8 trillion to the US deficit between 2026 and 2034. As a result, Moody's downgraded the US sovereign debt rating from AAA to Aa1, aligning itself with S&P and Fitch. The main reason cited was the inability of successive governments to contain the growth in debt and the expected extension of the 2017 Tax Cuts and Jobs Act, without a corresponding credible plan to cut spending.

Particular attention was also paid to the latest auctions of Japanese government bonds, which showed signs of strain especially in the ultra-long maturities. The yield on Japanese government bonds with 30-year maturities rose by +32 basis points, reaching 3%, a level not seen in over two decades. The peak in yields reflects a combination of structural factors: persistent inflation and reduced liquidity. This repricing has reignited attention on a delicate issue for the global market: the gradual unwinding of the so-called yen carry trade. For years, ultra-low rates in Japan encouraged investments funded in yen into higher-yielding assets, such as US Treasury bonds. But with rising yields and the tapering of the BoJ, the risk of unwinding these positions remains a key issue to watch.

The commodities index posted a slight increase in the month (+1.2%). After a strong rise since the start of the year and an increase in US real rates over the month (+26 bp to 2.2%), gold remained broadly stable (at $3,280 an ounce). Oil recorded a slight recovery (+1% to $64 a barrel), while the market remains cautious because of the gradual rollback of voluntary cuts by OPEC+ and a strategic shift aimed at regaining market share and improving compliance within OPEC.

In the months ahead, markets will remain focused on several dynamics that could affect the trend in corporate earnings, after a decidedly positive first half for equities. In particular, attention will turn to a potential slowdown in activity over the next two quarters, linked to a natural correction after the front-loading of orders that has supported demand in recent months. This could trigger a cooling phase, especially in cyclical sectors, already under pressure from global trade uncertainty. On tariffs, although a return to the pre-"Liberation Day" scenario is ruled out, the baseline scenario still assumes an average tariff level of around 10% by the United States, which remains historically high. Even if the impact may be more spread out over time than initially expected, it is likely to continue acting as a partial brake on growth.

In this context, however, policymakers seem ready to step in: from the United States to Europe to China, governments are preparing targeted fiscal measures, while central banks (Fed and ECB) remain proactive and ready to increase monetary support if needed. Against this backdrop, our preferred themes include defence, which is still at the centre of our portfolio with concentrated positions in Leonardo and Fincantieri. Telecom Italia Svg, the main position thanks to the solid investment case, supported by a better competitive landscape and much more straightforward governance with the entry of Poste Italiane. We remain highly selective in the financial sector, preferring stocks with a strong fee-based component (Fineco), while among the traditional banks our favourites are BMPS and Unicredit.

Driving the infrastructure sector are the investments planned by the German fund for energy, digital and infrastructure renewal (Buzzi, Danieli Sav.). The Italian mid and small caps, which after years of underperformance offer attractive valuations and are exposed to catalysts such as the rate cuts by the ECB, the launch of the Fondo Strategico Nazionale CDP in Italy and the implementation of the German plan. We are more cautious on the luxury sector: it remains under pressure due to weak demand in China and the United States, albeit with valuations back to attractive levels. We have started rebuilding some selected positions in utilities, in a rate environment that we expect to be lower than in the recent past. Finally, we are more positive on the semiconductor sector, based on our feeling that the bottom may already be behind us.

* Winner of the Morningstar Award 2025 for best fund in the "Italian Equity" category