RBC (TSX:RY) Wealth Management provided insights into several key events that could influence European stock markets in the first quarter of 2025. With various potential developments on the horizon, RBC highlighted opportunities that may arise within European equities, particularly if outcomes are better than expected or not as severe as feared.
One of the main concerns for European markets is the tariffs threatened by U.S. President-elect Donald Trump on the EU. RBC estimates that a 10 percent blanket tariff could reduce eurozone GDP by one percent two years after its implementation.
Since the U.S. elections in November, 2025 consensus GDP growth forecasts for the eurozone have been slightly downgraded to one percent from 1.2 percent. However, RBC suggests there could be room for negotiations, and by making concessions, the EU may avoid the worst-case scenario of an escalating trade war.
In Germany, the upcoming federal elections on February 23 could signal a shift in government, with the possibility of a coalition between the centre-right CDU/CSU and the centre-left SDP. RBC expects that a CDU/CSU-led government would likely loosen fiscal policy and potentially reform the country's stringent "debt brake."
Such a government may also prioritize pro-business policies, including a cut in business tax and a return to nuclear energy production, which could be favorable for the economy and equity markets.
Additionally, RBC notes that a healthier Chinese economy could benefit Europe, as China is a significant export market for European goods. Recent policy announcements from China indicate a shift towards a more proactive fiscal policy and a moderately loose monetary stance, which could suggest upcoming expansionary policies that would positively impact European fortunes.
Despite these potential opportunities, RBC advises caution, maintaining a modest Underweight in European equities due to various headwinds such as lack of competitiveness, sluggish economic growth, and geopolitical risks. Nonetheless, RBC believes that the current low valuations reflect these concerns and that any positive developments could offer investment opportunities.
The firm continues to focus on world-leading companies, especially in sectors like semiconductor manufacturing equipment, industrial engineering, and healthcare.
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