Fast reading
- The outlook for European shares – which are trading at a significant discount to global peers – has improved on hopes of an end to the Russia-Ukraine war.
- Germany is set to hold a federal election on 23 February and a new governing coalition is widely expected to triumph.
- Gold hit a another record high this week as investors fretted over the potential impact of US tariffs.
After spending the first two months of 2025 with all eyes on Washington, European investors will this weekend be focusing closer to home as Germany faces its most consequential election in recent history.
Voters in Europe’s largest economy head to the polls on 23 February, seven months earlier than planned after the ruling coalition collapsed in November.
Support for the three parties in the governing coalition –Chancellor Olaf Scholz’s Social Democrats (SPD), the Greens and the Free Democrats (FDP) – has fallen sharply since the previous election in September 2021.
The centre-right Christian Democratic Union (CDU) and its Christian Social Union (CSU) sister party have risen strongly in the polls, along with the far-right Alternative for Germany (AfD) and the populist leftwing Sahra Wagenknecht Alliance (BSW).
“Barring a major surprise, the CDU/CSU will likely be tasked with forming the next governing coalition, but it remains unclear who will be party to these talks, creating uncertainty around issues such as continued support for Ukraine and the green transition,” says Lewis Grant, Senior Portfolio Manager for Global Equities at Federated Hermes Limited.
Investor confidence has grown in recent weeks
“Investor confidence has grown in recent weeks with the CDU leading in polls, although we note that this has risen from a low base and there is little optimism for a true economic revival, merely hopes that the slowdown can itself be slowed,” he says.
“The strength of the coalition will determine whether meaningful changes to the debt brake mechanism can be enacted to provide much needed stimulus to the German economy.
“The next coalition has a challenging task in the face of US geopolitical ripples, weakening demand in China and high energy prices. A lack of consensus or a surprise outcome, is likely to see a flight to safety and benefit high-quality, defensive sectors,” Grant adds.
Figure 1: European stocks have outperformed US this year
European equities rally
European stock markets have begun the year strongly on the hope that the region’s economic outlook will improve.
The pan-European Stoxx Europe 600 index is up 8.6% YTD compared to US blue-chip the S&P 500 index 3.6%1.
European shares are trading at a significant discount to global peers.
Russia’s invasion of Ukraine in 2022 – which fuelled a global surge in inflation on the back of soaring energy prices – dampened investor interest in the region and the possibility that the war might end has bolstered European stocks.
Top Russian and US officials met in Saudi Arabia this week to discuss finding a way to end the conflict.
Gold hits new high
European assets have also been supported by fact the US has yet to impose tariffs on the EU.
The potential impact of tariffs elsewhere – including a 10% tariff on Chinese imports and a 25% tariff on steel and aluminium – have helped push the price of gold to all-time high this week.
The yellow metal – a safe-haven in times of uncertainty – has gained 11% so far this year and was trading above the US$2,950 per ounce level on Thursday2.
“Gold prices will likely remain elevated throughout 2025 against the backdrop of increased central bank purchases, mounting concerns about disruptive US tariffs and demand from newly introduced gold ETFs,” says Peter Smith, Senior International Equity Strategist at Federated Hermes.
“Central banks are increasingly moving away from US treasuries as investments for their currency reserves, with China in particular, sitting on a US$1tn trade surplus in 2024, aggressively buying gold,” he says.
However, Smith warned the gold price could weaken if the interest rate differential remains wide between the US and the rest of the world, because it would help the US dollar remain strong, which should put downward pressure on gold.
“Such a scenario is not our base case, but with inflation sticky in the US, the Federal Reserve has signalled it is willing to keep rates ‘higher for longer’,” Smith adds.
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1 Bloomberg as at 16:30 GMT on 20 February 2025
2 Ibid.
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