European Markets Braced for Choppy Start as Geopolitical Uncertainty Persists

As the new year begins, European markets find themselves in a precarious position, bracing for a choppy start amid persistent geopolitical uncertainty. The Russia-Ukraine conflict and Brexit negotiations continue to cast a long shadow over the continent, with investors grappling with the fallout from these geopolitical events.

The Russia-Ukraine conflict has had a significant impact on European markets, particularly in the energy sector. The European Union's reliance on Russian gas has been a major concern, leading to increased energy prices and uncertainty. This has affected the overall economic growth and inflation dynamics in Europe. Despite these challenges, the European real estate market is expected to remain a leading destination for global cross-border capital in 2025, with solid occupier demand and pricing adjustments attracting investors.

Brexit, on the other hand, has had a significant impact on the European real estate market, particularly in the UK. The uncertainty surrounding Brexit has led to a slowdown in investment activity in the UK, with investors preferring to wait for clarity on the future relationship between the UK and the EU. However, the UK remains an attractive destination for international investors, with the office sector supported by limited supply of ESG-compliant prime assets.

Central bank policies, particularly those of the European Central Bank (ECB), have been responsive to inflation dynamics and have significantly influenced market performance. In 2024, the ECB began its widely expected rate cuts as inflation was pushed below its target level. This policy shift was driven by the need to support economic growth and market recovery, as Germany remained in a shallow recession despite a broader Europe-wide recession being avoided.

The ECB's rate cuts have had a positive impact on bond and stock markets, which have rebounded as some of the expected rate cuts have already materialized. This policy response has contributed to a modest 20-country GDP growth forecast of 1.1% for 2025. Additionally, the ECB's rate cuts have made debt accretive to equity investors, with prime cross-sector Eurozone property yields already at 5.2%.

The ECB's rate-cutting strategy is expected to continue in 2024, with Nomura anticipating that the central bank will initiate its cycle of interest rate reductions in June 2024. The ECB aims to transition rates from a restrictive level to a neutral one, with the depo rate projected to reach 2.75% by the end of 2024. This policy response is intended to support economic growth and market recovery, as the ECB seeks to keep rates at the higher end of the neutral range to address potential structural factors that may see inflationary pressures more pronounced versus pre-pandemic levels.

In summary, European markets are set to fall at the open after a choppy start to the year, with geopolitical uncertainty and central bank policies playing a significant role in market performance. Investors must navigate the complex landscape of geopolitical tensions, economic growth concerns, and regulatory pressures to capitalize on opportunities in the European real estate market.