The odds of a rate hike by the ECB are rising. European equities at a discount

Equities offer buying opportunities on dips. On the rate front, the market assigns a 53% probability to a hike as soon as the April meeting.

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

We remain positive on European equities and expect a strong recovery in capital inflows into European stock markets for diversification purposes, with a further reduction in the discount on European stocks versus US stocks. As for the ECB, the market assigns a 53% probability to a hike as soon as the April meeting and is pricing in around 70 basis points of cumulative increases in interest rates by the end of 2026, with the benchmark rate expected to stand at around 2.70%.

Despite the economic turbulence linked to Iran, equity stocks in the EU have seen a sustained narrowing of the discount versus the United States. We should note that the LFL discount (like-for-like growth) between Europe and the United States exceeded its downward trend range at the start of this year, and previous such breaks have seen the discount narrow to single digits. We suggest using this phase of market weakness in equities to buy on dips for the following reasons: Trump does not have public opinion on his side and, secondly, with the midterm elections in view, we do not believe Trump can afford to reach November with the equity market in tatters. So the war must end soon.

March was marked by a sharp rise in volatility on financial markets, triggered by the escalation of the conflict in the Middle East and the resulting tensions on the energy front. The prolonged closure of the Strait of Hormuz represented a break from previous geopolitical shocks, introducing the risk – at least in theory – not only of higher energy prices, but also of physical supply constraints. Equity markets underwent a significant correction (global equities -7.7% in USD, -5.4% in EUR), albeit in an orderly fashion. The performance of European equity and Italian markets (STOXX600 -7.1%, FTSE Italia All-Share -6.5%) remained broadly in line with that of US markets (S&P500 -6%, Nasdaq -6.2%) and slightly outperformed emerging markets (-9.3% in EUR).

The correction in equity markets in March appears consistent with historical episodes of regional conflicts, which typically generate declines in the 5-10% range, with larger drops only when prolonged energy shocks are involved. At current levels, a significant portion of the correction already seems priced in, especially under the base scenario of a gradual de-escalation or, at the very least, containment of the most extreme macroeconomic effects. Interest rates have also reflected a more complex environment and revised expectations: yields have risen, with the US 10-year note up +38 bp (to 4.31%) in March, the German Bund by +38 bp (to 3.02%) and the BTP by +65 bp (to 3.92%), resulting in a widening of the BTP-Bund spread by around +27 bp to 90 bp.

As for the Fed, the yield curve is now pricing in levels broadly unchanged from current ones by the end of 2026, compared with expectations at the end of February that embedded around two and a half cuts (-60 bp). We do not expect any imminent moves from central banks, as the impact of current increases in energy prices appears so far more contained than in 2022, inflation expectations remain anchored (inflation swaps for EUR/USD at 5 years at 2.15% and 2.31%, respectively, up from 2.08% and 2.38% at the start of the month) and signs of second-round effects on wages and prices remain limited for now, allowing the Fed and the ECB to maintain a wait-and-see, strongly data-dependent approach.

Gold has suffered a particularly sharp correction, down about 15% from its early-year highs and falling from record levels near $5,500 to the $4,600 area. In our view, the move has been driven mainly by profit-taking and deleveraging by speculative investors, as well as higher real yields linked to expectations of rising interest rates. We believe that, in a context of fiscal dominance and given governments' need to monetize debt, gold continues to represent a benchmark asset class.

At the investment level, our preferred themes include renewable energy and infrastructure, driven by the investments planned by the German fund for energy, digital and infrastructure renewal (Danieli Sav.), while we are very selective on financials, with a preference for BPER and BMPS. Other names we find interesting are STM and Saipem, Stellantis, in light of the recent very negative news regarding write-downs that have brought the share price to levels we consider a very interesting entry point, and Telecom Italia Svg, which remains a solid investment case, supported by a better competitive landscape and much cleaner governance with the arrival of Poste Italiane.