Challenges facing European markets set to persist through 2025

Europe will continue facing challenges in 2025 amid domestic political uncertainties and global events, such as Trump’s tariffs threats and China’s slowdown. These factors are likely to continue weighing on market performance, particularly in the car manufacturing and banking sectors.

The European stock markets have broadly underperformed their global peers, particularly Wall Street throughout the year. Several factors have contributed to this trend, including a lack of robust technology components, political instability, China’s slowdown, and geopolitical tensions.

Looking ahead, these challenges are expected to persist in 2025, with two key global events poised to play pivotal roles: Trump’s presidency and China’s growth trajectory. Domestically, the German and French political turmoil will remain a significant drag on market sentiment.

Trump’s tariff threat

The European economic outlook is closely tied to global markets, with many companies relying heavily on international revenues. This makes Trump’s proposed tariffs a critical concern, especially for Germany, Europe’s largest economy.

During his presidential campaign, Trump threatened to impose tariffs on German car manufacturers unless they relocated production to the United States. “I want them to build their plants here”, he said, calling tariffs “one of the most beautiful words”.

Last month, he announced plans to impose new tariffs of 25% on Canada and Mexico, and an additional 10% on China, effective upon taking office in January. Although no specific tariffs targeting the eurozone have been confirmed, the European carmaker’s stocks experienced a sharp selloff on the day of the announcement, underscoring their vulnerabilities to global trade dynamics.

If the US proceeds with tariffs on European goods, the car manufacturing sector could be among the hardest hit. Already under pressure from the prolonged Ukraine conflict and weak demand in China, the European automotive industry faces a deepening recession.

The Euro Stoxx Automobiles & Parts Index has fallen 13% year-to-date, making it one of the worst-performing sectors in the European markets, in contrast to the 7% rally in the broader Euro Stoxx 600 index. German car maker stocks, including Mercedes-Benz, Porsche, Volkswagen, and BMW, have suffered declines of 13% to 25% this year.

Weak Chinese consumer demands

The sluggish Chinese consumer demand has been a key factor that dragged on European market performance this year, particularly seen in luxury consumer stocks. Despite the ongoing stimulus measures, China’s economic recovery has been faltering.

“Unless Chinese authorities shift towards stimulating domestic demand, stimulus is unlikely to provide a sustained boost for European stocks, with the positive spill-over of said measures relatively limited”, said Michael Brown, a senior research strategist at Pepperstone London.

On a positive note, the Chinese government recently provided its strongest pledge to bolster the economy through “proactive fiscal policy and more moderative easing monetary policy”.

Economists anticipate that China will further reduce interest rates and increase its deficit level in 2025. Chinese officials have also emphasised the prioritisation of improving domestic consumer demand in the coming year. Should these policies be effectively implemented, the European consumer sector could see a meaningful recovery.

However, risks remain. A potentially renewed US-China trade war could devalue the Chinese yuan further, eroding consumer purchasing power and dampening the demand for European goods.

Political instabilities

Political uncertainties in France and Germany will certainly remain a bearish factor for the European stocks. The French equity market has been the worst performer in major global economies, with the benchmark CAC 40 posting negative growth this year, in contrast to strong rallies in the US and parts of Asia.

In Germany, though, the DAX mirrored global trends and reached fresh highs, thanks to the outperformance in the technology and defence sectors. Markets will closely watch the German snap election in February, triggered by a ruling coalition’s fallout, which is seven months ahead of schedule. However, the party coalition negotiations could take months to settle.

Meanwhile, France continues to grapple with soaring government debt and political gridlock over the 2025 budget. With public debt reaching 112% of GDP and ongoing political upheaval, the banking sector faces mounting pressure amid concerns over public finances.

The absence of stable leadership in Europe’s largest economies is expected to weigh on market sentiment.

Michael Brown noted: “Eurozone assets will likely continue to carry a greater risk premium than their peers”.

This increased risk premium is reflected in rising government bond yields, which could constrain borrowing and limit liquidity.