The Eurozone economy has been hindered by political instability, escalating geopolitical tensions and the uncertain impact of the policies set to be introduced by the incoming Trump administration, the impact of which remains uncertain at this stage.
According to Financial Times, risks to growth in the EU are largely tilted to the downside, a sentiment mirrored by the European markets, which have generally underperformed their global counterparts. Additionally, with the majority of the continent struggling with excessive debt, the challenges for the region continue to mount.
Per a survey by Bank of America, as quoted on Financial Times, global fund managers are underweight on European equities, with little expectation that they will outperform other markets in 2025.
Vulnerabilities Tied to Economic Woes of its Global Partners
The outlook for the European economy is closely linked to global markets, as many companies depend significantly on international revenues. With growing uncertainties in its key trading partners like the United States and China, 2025 could be a challenging year for European markets.
The slowdown in China, one of the EU’s largest trading partners, has significantly contributed to the underperformance of the European market in 2024. Weak Chinese consumer demand has weighed down on luxury consumer stocks in Europe, according to euronews.
However, per euronews, economists expect China to further lower interest rates and increase its deficit in 2025, resulting in a significant recovery for European stocks.
President-elect Donald Trump’s proposal to impose 10% to 20% tariffs on all U.S. imports has created uncertainty in European markets. According to a report by Citi, as quoted on CNBC, a 10% tariff could reduce the GDP of the EU by 0.3% by 2026.
Additionally, per ECB Governing Council member Robert Holzmann, as quoted on CNBC, a likely scenario is that Trump’s tariffs could slow down overall growth while simultaneously creating inflationary pressures in the region.
The Eurozone’s economy could face additional headwinds from the potential negative impact of the United State’s proposed 60% tariff on China. A possible resurgence of the U.S.-China trade war could lead to further devaluation of the Chinese yuan, reducing consumer purchasing power and weakening demand for European goods, imposing further pressure on the EU economy.
The Impact of Region’s Political Instability
Political instability in France and Germany, two of the Eurozone’s largest economies, is expected to continue exerting downward pressure on European markets. France is grappling with a political deadlock over the 2025 budget and rising government debt, with public debt at 112% of the country’s GDP.
The lack of stable leadership in Europe’s largest economies is expected to negatively impact market sentiment. According to Michael Brown, as quoted on euronews, assets in the Eurozone are expected to carry a greater risk premium than those of other regions.
ETFs to Consider
Below, we highlight a few ETFs with exposure to the Eurozone, for investors to consider, given the bleak outlook for the single currency bloc and headwinds expected to persist throughout 2025. The following funds have been trending downward since late September 2024, declining by about 12% (as of Jan. 2).
Vanguard FTSE Europe ETF (VGK – Free Report)
Vanguard FTSE Europe ETF seeks to track the performance of the FTSE Developed Europe All Cap Index with a basket of 1,263 securities. The fund has amassed an asset base of $116.53 billion and charges an annual fee of 0.09%.
Vanguard FTSE Europe ETF has gained 10.46% over the past year and has a dividend yield of 3.61%.
iShares MSCI Eurozone ETF (EZU – Free Report)
iShares MSCI Eurozone ETF seeks to track the performance of the MSCI EMU Index with a basket of 221 securities. The fund has gathered an asset base of $6.59 billion and charges an annual fee of 0.51%.
iShares MSCI Eurozone ETF has gained 7.91% over the past year and has a dividend yield of 2.90%.
iShares Core MSCI Europe ETF (IEUR – Free Report)
iShares Core MSCI Europe ETF seeks to track the performance of the MSCI Europe Investable Market Index with a basket of 992 securities. The fund has amassed an asset base of $4.06 billion and charges an annual fee of 0.09%.
iShares Core MSCI Europe ETF has gained 10.12% over the past year and has a dividend yield of 3.55%.
JPMorgan BetaBuilders Europe ETF (BBEU – Free Report)
JPMorgan BetaBuilders Europe ETF seeks to track the performance of the Morningstar Developed Europe Target Market Exposure Index with a basket of 396 securities. The fund has amassed an asset base of $3.64 billion and charges an annual fee of 0.09%.
JPMorgan BetaBuilders Europe ETF has gained 10.40% over the past year and has a dividend yield of 2.22%.
SPDR EURO STOXX 50 ETF (FEZ – Free Report)
SPDR EURO STOXX 50 ETF seeks to track the performance of the EURO STOXX 50 Index with a basket of 50 securities. The fund has amassed an asset base of $3.03 billion and charges an annual fee of 0.29%.
SPDR EURO STOXX 50 ETF has gained 8.99% over the past year and has a dividend yield of 2.97%.
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