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Investors call peak pessimism, start bargain hunting

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Europe weighed down by political turmoil, tariff threats

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Potential German stimulus, China recovery seen as

catalysts

By Naomi Rovnick

LONDON, Dec 16 (Reuters) - The year ahead is shaping up

badly for Europe with its financial markets already hit hard by

U.S. tariff fears and political turmoil in France and Germany,

yet some investors are calling peak pessimism and hunting for

bargains amid the gloom.

European stocks are set to underperform the U.S. by the most

in at least 25 years, MSCI data showed, while the euro has

slumped more than 5% against the dollar and some

forecasters expect sustained bad news to drag it below $1.

But as the region's markets get cheaper, investors are

increasingly interested in hunting for bargains, arguing that

assets are fully priced for more disappointment and could rally

strongly if the geopolitical and economic backdrop brightens.

"We believe Europe could be a positive surprise for

underexposed investors," said Edmond de Rothschild co-head of

equities Caroline Gauthier. "We are close to reaching a peak in

negativity and that is good news."

A broad MSCI index of continental European stocks

has gained 4.6% this year, while a comparable

U.S. index surged 29% as artificial

intelligence fever powered stunning gains for the tech titans

that dominate Wall Street equity markets.

"Valuation levels in Europe are (now) far more attractive,"

said Sonja Laud, CIO of Britain's biggest asset manager Legal &

General Investment Management,

The manager of $1.5 trillion of investments was not yet

broadly raising exposure to Europe, she added, but warming to

stock market sectors like car makers and luxury goods that would

benefit if China's slowdown eased and U.S. tariffs were less

punitive than feared.

Euro zone productivity is weak, the European Central Bank

downgraded its growth forecasts on Thursday alongside its fourth

rate cut of the year, and cautious households are hanging onto

their savings.

Yet, in one sign traders see market pricing as extreme,

German stocks have started to soar. Germany's DAX index is up 4%

so far in December and set for its best month since March

.

Europe's biggest asset manager Amundi forecasts strong gains

for the euro next year while other major European investors are

warming to beaten-down French stocks.

Germany is expected to hold snap elections in February after

Olaf Scholz's fractious coalition collapsed and while top

leadership contender Friedrich Merz backs stimulus spending,

that would also require unusually strong cross-party unity.

"We're trying to make the most of the pessimism we see in

Europe," said Kevin Thozet, investment committee member at

European asset manager Carmignac, adding he was building

positions in European multi-nationals that have similar

businesses to U.S. peers but trade on lower valuations.

For sure, euro zone economic trends remain woeful. Citi's

economic surprise index for the bloc is below the zero level,

showing data is widely missing expectations.

But it has stopped falling sharply, indicating that the

severity of negative data shocks for markets has reduced.

"Bearish positioning (in Europe) has reached extremes," Citi

strategists said on Dec. 10, recommending clients buy into the

region because monetary and government stimulus would benefit

economically cyclical businesses in sectors like manufacturing

and travel.

Columbia Threadneedle chief European economist Steven Bell

said European assets were cheap "for good reasons," citing the

region's economic struggles.

But, he added, the asset manager was investigating

opportunities among cheaply valued French stocks that could

rally if the nation's budget stresses abated.

WALL STREET BUBBLE?

Bank of America strategist Michael Hartnett said in a note

to clients that potential U.S. tariffs will push U.S. inflation

and interest rates higher by the spring of 2025, sparking a rush

of investment into "cheap" international alternatives to U.S.

stocks.

U.S. equity markets are heavily dependent on the fate of big

tech stocks, whose runaway gains have taken so-called

concentration risk, which rises as the number of stocks that

dominate a market declines, to record levels, data from

investment group Simcorp showed.

Hartnett predicts a "major correction" in U.S. stocks in the

first half of 2025 and expects European companies to attract

more investment for this reason.

($1 = 0.7920 pounds)