In markets, the real secret sauce for the US — its magic trick to lure in global investment funds and keep them there — is the benefit of the doubt. This is what Europe is now trying to earn.
In the US, the new administration is hostile to multilateralism, democratic alliances, science, academia and the rule of law. It also seems curious about resetting the global financial system to see whether it boosts domestic manufacturing. What can possibly go right? And still, not all but plenty of investors and analysts are looking at the recent drop in US stocks and wondering whether it presents a buying opportunity.
This is far from a niche view, and here’s one example: “We think the sell-off in US equity markets has been driven by policy uncertainty largely stemming from tariffs and tariff threats (and Doge to a lesser extent),” said David Lefkowitz, head of US equities at UBS Global Wealth Management, in a recent note. What this situation calls for, he argues, is details. “Once we receive policy clarity, stocks are likely to recover.”
It sounds bizarre but it could be right. The exorbitant privilege of the US comes from operating the world’s biggest, baddest reserve currency and, it must be said, from being home to some of the most successful companies on the planet. That means “policy clarity” on how the administration might disrupt carefully curated trading networks, no matter how harmful, could be enough to bring a reprieve.
Here on the other side of the Atlantic, by contrast, we have a Europe that shows signs of working with a unity of purpose for which precedent is scant, in the service of defence against a hostile neighbour to the east and independence from an unreliable ally to the west. Germany has demonstrated that it is serious about breaking from its time-honoured austere ways and is willing to do whatever it takes to revamp infrastructure and defence; the EU is seeking to build collective arms purchasing — a major shift of power to Brussels. European stock markets are up by double figures for the year so far while the US is under water.
And yet even those in the unusual position of being positive on European assets still have concerns. Again, to pick one of many, Eurizon’s Stephen Jen and Fatih Yilmaz put it like this: “Investors should be favourably inclined towards euro assets, including the currency. However, investors should also be mindful of all the structural flaws that will one day return to haunt these same assets if they are not fixed . . . We suspect the intra-European divergences may widen in the coming years as core economies like Germany outrun the peripherals. The bullish European market narrative is a nuanced one.”
Old reputations are hard to break, and the EU’s image as a regulation generation machine attached to a structurally unsound currency is set deep. Again, this is not without justification. But the outlook has brightened, against the run of investor expectations. Still, fund managers writ large are not amassing big positive bets on Europe, as such. They are getting back to neutral after years of avoiding the region almost entirely.
BNP Paribas — a French bank — is among those banging the drum for investors to truly take a new view on Europe, with a clutch of its analysts saying at a presentation this week that the newfound willingness in Germany to borrow and spend its way out of trouble is a “game-changer”.
Yes, they said, the risk of painful trade tariffs from the US means this may take a while fully to crystallise. It may also take a little time for Europe to cut its reliance on imports for defence, denting the degree to which arms spending will boost the economy in the short term.
Even so, “Europe is very exciting for us at the moment”, said currencies analyst Sam Lynton-Brown. “The speed of reform in Germany was not expected by the market so people are quite open-minded to update their view.” Significantly, higher German government bond yields reflect a decline in prices, of course — tough for anyone holding the debt already. But longer term, higher yields will convince homegrown funds to stick in Europe, draw in foreign capital, and drive up the euro, maybe to $1.20 next year, the bank reckons. (It’s now at $1.09.)
Client pushback to this rosy view did still happen, the analysts said. As we saw in the Eurozone debt crisis a decade or so ago, the EU is the master of scurrying to imperfect and complicated solutions for simple but divisive problems. Heaven knows its competitive challenges have been made very clear before, with little immediate impact.
But the “I’ve seen this EU movie before” mentality is melting away, and money is heading out of the US and into Europe at pace. A shift in mindset among money managers is not the only factor needed to get the Make Europe Great Again investment theme to stick, but it is an important one. Europe needs to harness the benefit of the doubt that the US has enjoyed for so long.
katie.martin@ft.com
