2026: the German spending plan as a catalyst for Europe’s economic recovery

The German spending plan strengthens the constructive view on European and Italian equity markets, even though higher tariffs are likely. In the portfolio: defence, infrastructure, Italian mid- and small-caps and luxury.

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

The spending measures approved by the German government, made possible by the reform of the debt brake, mark a turning point in the country’s fiscal policy: a paradigm shift designed to stimulate economic growth and relaunch public investments and private investment after years of industrial stagnation. In our view, they represent one of the main catalysts for the recovery of the European economy in 2026 and reinforce our constructive view on European equity markets and Italian ones, which still offer attractive valuations.

In June 2025 the German government approved the 2025 budget draft and the parameters for 2026-2029, marking an unprecedented change in its fiscal policy. The main novelty is the concrete launch of a massive fiscal stimulus to revive the economy, particularly through public investment in infrastructure and defence. The government authorised more than 200 billion euro of spending in 2025 alone for infrastructure and defence, financed by a sharp rise in borrowing (up to 3.3% of GDP in 2025). A infrastructural package worth 500 billion euro over 12 years, of which 115 billion in 2025 (+55% compared with 2024); a rapid increase in defence spending, up to 95 billion euro in 2025 and 135 billion in 2027, with the goal of reaching 3.5% of GDP by 2029, exceeding expectations.

The main resources of the 2025-2029 spending plan will be allocated to strategic sectors: transport infrastructure (with particular focus on rail networks), defence, energy and the power grid, digitalisation (including the modernisation of public administration and digital infrastructure in education and production), social housing and education.

Global equity markets have meanwhile reached new highs (+24% from the April lows) thanks to improving earnings expectations, the limited impact of tariffs and potential rate cuts by the Fed. However, trade tensions remain high: with 8 July marking the end of reciprocal tariff exemptions, it is likely that tariffs will rise (Trump has already announced a 30% measure in recent days), including in new sectors such as pharmaceuticals and electronics, and that they will be extended to Southeast Asian countries to bring them into line with China. The EU disputes the US approach and could respond with retaliatory measures. In addition, macroeconomic data remain lacklustre, increasing uncertainty over the growth outlook. For these reasons, we are maintaining a cash reserve within our moderately positive approach so as to exploit potential tactical opportunities in the event of corrections, especially during the summer months, which are characterised by lower liquidity and a reduction in portfolio risk.

Our preferred themes include Defence, still at the centre of our portfolio, with concentrated positions in Leonardo and Fincantieri. Telecom Italia Svg is the main position thanks to the solid investment case, supported by a better competitive backdrop and much clearer governance with the entry of Poste Italiane. In financials we are very selective, preferring stocks with a high fee component (Fineco), while among traditional banks our favourites are BMPS and Unicredit. As for Infrastructure, these will be driven by the investments planned by the German fund for energy, digital and infrastructural renewal (Buzzi, Danieli Sav.).

Italian mid-small caps, moreover, after years of underperformance, offer attractive valuations and are exposed to catalysts such as the Bce’s rate cut, the launch of the Fondo Strategico Nazionale CDP in Italy and the implementation of the German plan. We are becoming more optimistic on the luxury sector, as valuations now more or less fully discount further earnings cuts. Attention will be focused on the messages delivered by the management of the leading players (LVMH, Hermes, Richmont) on a potential recovery in the second half of the year. We continue to be more positive on the semiconductor sector, based on our feeling that the bottom has been reached.

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