European equities rise on plans for stimulus spending, peace talks

European equities are outperforming their U.S. counterparts despite tariff threats and ongoing security concerns, says Lenny McLoughlin, chief investment strategist with Irish Life Investment Managers.

McLoughlin said a shaky political relationship with the world’s leading economic power has not dimmed Europe’s prospects. Indeed, the euro is strengthening and markets are up.

“European equities have actually done well this year. They’ve outperformed U.S. equities by about 13% in local currency terms, by about 19% in dollar terms,” he said.

Speaking on the Soundbites podcast, McLoughlin said earnings forecasts have held up better than other countries, partly aided by a weak euro in Q4 2024 which made imports to Europe more expensive and exports more profitable.

“Despite the tariff threats that we have coming from the U.S., European business sentiment and activity have actually bottomed this year and have slightly improved,” he said. “That’s been supportive of European equity markets.”

Looking forward, economists are predicting a peace dividend from a potential ceasefire between Russia and Ukraine.

“That’s really linked to potential resumption of flows of energy from Russia back into Europe, particularly on the gas side of things, where gas prices are still three times the level that they were pre the war,” he said.

And adding to the optimism, announced infrastructure and defence plans as well as ambitious stimulus spending — particularly in Germany — are also likely to boost the European economy in the longer term.

“It probably adds about 0.2% to growth this year. But in coming years, it’ll add about 1% to German growth, pushing growth to about 1.5% to 2% over the next 10 years, per annum,” he said. “In terms of European growth, the impact is less. It’ll add about 0.3% to European growth over the next three to four years.

The European Central Bank was expected to lower rates twice this year, by a total of 75 basis points.

“Given the improved growth prospects, the market has basically taken out one rate cut from the ECB and is now expecting only 50 basis points of further cuts over the remainder of this year, giving a terminal deposit rate of 2%,” he said.

The euro has strengthened against the U.S. dollar, from $1.02 at the start of this year to $1.07.5 [as of March 25]. And McLoughlin said a value of $1.15 by the end of the year “would not be unreasonable.”

“In terms of the longer-term outlook for European equities, the structural outlook has definitely improved,” he said. “But to see sustained outperformance from Europe, I think you need to see additional reforms coming through.”

He’d like to see progress on the Capital Markets Union plan to create a single market for capital, and the implementation of recommendations by former Italian prime minister Mario Draghi designed to boost European productivity through increased investment.

“If we were to see further reforms being implemented and deregulation, then the outlook for Europe over the medium to long term could be further enhanced,” he said.

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.