The risk of war hasn’t been as high since 1945, warns French prime minister François Bayrou, but investors seem to think otherwise. European stocks have been on fire, enjoying their best start to a year in almost 40 years and their strongest performance relative to the US in a decade.
The rally was initially fuelled by Donald Trump’s decision to delay European tariffs, and has accelerated due to hopes of an end to the war in Ukraine.
“The biggest geopolitical threat to the market could be nearing its end”, headlined Business Insider, a take seemingly shared by many investors. The odds of a ceasefire in 2025 spiked higher, to 74 per cent, on prediction market Polymarket.
Ending the war “could significantly reduce inflation pressures, allowing central banks to cut interest rates faster and stimulate the economy”, says Panmure Liberum’s Joachim Klement.
Most European asset classes “still reflect a war risk premium” says Barclays, suggesting stocks have room to run.
European stocks look very cheap relative to the US, and a plurality of respondents to Bank of America’s latest fund manager survey now expect Europe to be the best-performing stock market globally this year.
There are some obvious caveats, however.
Firstly, European stocks look cheap relative to the US, but they don’t look especially cheap relative to history. The MSCI Europe’s price-earnings ratio has increased from 13.3 in January to 14.5. That’s actually just above its historical average, says Barclays, and the highest since the onset of the Ukraine war in early 2022.
Secondly, one doesn’t need to be a doomsayer to be alarmed by the seismic geopolitical shifts under way. The transatlantic alliance has never looked weaker, with the US instead “cuddling” Vladimir Lenin, as former British prime minister John Major noted.
The US president is spouting Kremlin talking points, calling Volodymyr Zelenskiy a thief and a dictator. Vice-president JD Vance is essentially championing far-right, pro-Russian political parties.
Trump, with his penchant for authoritarian strongmen, seems happy to reward Russian aggression and give Putin what he wants – the Ukrainian territory he seized and flimsy security promises that fail to curtail future adventurism.
Investors may be hopeful, but they should also be wary about a cheap, fragile peace.
