Are we along for the ride as Europe kicks off strongly?
In the first two months of this year, European equity markets shot up solidly. In fact, European equities outperformed their US counterparts by some 10%. The big US technology companies seem to remain somewhat spot on, partly due to the meteoric rise of China's cheaper DeepSeek's AI model early this year. Mark Van Assche, account manager Private Banking and Wealth Office, talks to Siegfried Top, investment strategist at KBC Asset Management.
05/03/2025
Economy
- All kinds of figures are coming in thick and fast.
- While purchasing managers were slightly less negative in Europe, the figure for the service sector in the US was somewhat disappointing and consumer demand appeared to be weakening. The outlook for China remains meagre as well.
- Fourth-quarter economic growth came in at around zero in the euro area and (at 2.3%) was also lower than expected in the US.
Comodity prices - inflation
- Inflation in both the US and Europe is currently being driven by stubborn but not accelerating core inflation (especially in the service sector). In the meantime, natural gas prices have eased somewhat, which is positive for Europe.
- On top of this, Trump policies (via planned import tariffs and the impact of stricter migration policies on the labour market) are widely believed to push global inflation slightly higher again.
Fiscal and monetary policy
- Trump is planning new tax cuts under his leadership and is even toying with the idea of eliminating income taxes. However, the extent to which his tariff plans can compensate for this remains to be seen.
- China also continues to regularly support its flagging economy through new policy decisions.
- In the euro area, major investments are set to be made in defence and infrastructure.
- Both the Fed and the ECB are already well on their way to lowering policy rates. The Fed has also taken a time-out recently, whereas the ECB trimmed another 25 basis points off its key rate.
Bond markets
- Yields are increasing again, especially in the euro area.
- Even Germany is abandoning its penchant for budgetary control in order to quickly expand its military capabilities.
- As a result, European government bond yields have risen sharply, going up at a speed not seen since the early 1990s. This unprecedented increase has caused bond prices to tumble in just a few days.
Equity markets
- The results season is largely complete.
- S&P500 companies easily outperformed expectations with earnings growth of 13% and financials and technology the sectors with the most positive surprises. Analysts are now expecting earnings growth in excess of 12% for US companies in 2025. This seems feasible, although the contribution from the technology sector is declining and other sectors are expected to contribute more.
- In Europe, earnings and turnover growth were slightly higher than expected, putting the region on track to record its first growth in earnings in two years (approximately 2%). The expected earnings growth of 8% for 2025 is almost certainly too high.
Risks
- The conflict in the Middle East and Ukraine could continue to cause nervousness.
- As far as what will happen to the aid to Ukraine, Trump's policy decisions could certainly have a big impact, something we’ve seen for ourselves in the past few weeks. As a result, there was considerably more volatility last week.
- Lastly, Chinese AI technology may throw a spanner in the works due to the fact that DeepSeek has achieved impressive results at a fraction of what it costs in the West.
Trump has investors in his grip, and European defence plans drive up bond yields
Siegfried top, Senior Investment Strategist KBC Asset Management
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