Investors 'Make Europe Great Again' with Big Stock Allocation, BofA Says

In a surprising turn of events, European stocks have seen their second largest allocation in a quarter of a century, according to a survey of investors from BofA Global Research. This significant shift in investor sentiment, which occurred in January 2025, reflects a growing optimism towards risk assets, particularly the U.S. dollar and stocks, while investors remain bearish on other asset classes (BofA, 2025).

Historically, European stocks have not been as favored by investors as other regions. However, the January 2025 survey indicates a notable change in this trend. The allocation to equities saw its most drastic jump since June 2020, with 31% of investors now reporting an overweight position, reflecting a 20 percentage point rise from the previous month (BofA, 2025).

Several factors contributed to this shift in sentiment:

1. Expectations of Federal Reserve rate cuts: Investors anticipate that the Federal Reserve will lower interest rates, which can boost stock prices by making borrowing cheaper and encouraging corporate investment.
2. China's economic stimulus: China's substantial economic stimulus measures have lifted investor sentiment, with emerging market stocks and commodities identified as primary beneficiaries (BofA, 2025).
3. Improving growth expectations: The survey reflects a broad-based uptick in growth expectations, equity allocations, and a retreat from bonds. Investors have reacted strongly to the prospect of a "soft landing" for the global economy, with 76% expecting this scenario to unfold (BofA, 2025).
4. Disorderly rise in bond yields: Investors view a disorderly rise in bond yields as the most bearish development for 2025, indicating that they are concerned about the potential impact of higher borrowing costs on economic growth and corporate earnings (BofA, 2025).

As a result of this increased allocation, specific sectors and companies within the European market are expected to benefit the most. These include:

1. Telecommunications: The European Central Bank (ECB) is expected to lower interest rates to 1.75% by the middle of 2025, which should create opportunities in more indebted sectors like telecoms. Lower interest rates reduce the cost of borrowing for these companies, improving their profitability. Examples of telecom companies that may benefit include Vodafone Group (VOD.L), Deutsche Telekom (DTE.DE), and Orange (ORA.PA).
2. Consumer-facing areas: These sectors, such as retailers and travel companies, are expected to be more robust due to the combination of lower interest rates and their exposure to the domestic consumer in Europe. Lower interest rates make borrowing cheaper for consumers, encouraging spending. Examples of companies in these sectors include Inditex (ITX.MC) - owner of Zara, H&M (HMb.SD), Ryanair (RYAAY), and easyJet (EZJ.L).
3. Real Estate: Lower interest rates should also benefit real estate companies, as they typically have more indebtedness and floating debt. This sector may see increased M&A activity, which can help smaller and mid-sized companies. Examples of real estate companies include Unibail-Rodamco-Westfield (URW.PA), Klepierre (LKP.PA), and British Land (BLND.L).
4. Small- and mid-sized companies (SMEs): These companies tend to be more indebted and have more floating debt, so they should benefit from lower interest rates. Additionally, increased M&A activity can create opportunities for SMEs to be acquired. Examples of SMEs in various sectors include those in the telecom, consumer-facing, and real estate sectors mentioned above, as well as other sectors like manufacturing, technology, and healthcare.



European stocks are currently trading at a 5% discount to our fair value estimate, which is attractive compared to other global markets. This is highlighted in the report "GET YOUR MOTOR RUNNING - ARE YOU READY FOR THE NEXT UP-CYCLE?" which states, "European equity markets move into 2025 with economists expecting modest growth from falling interest rates, which should benefit the markets. European stocks are trading at a 5% discount to our fair value estimate, and attractive investing opportunities exist across multiple sectors, despite political and tariff concerns."

Geopolitical uncertainties, such as armed conflicts in Ukraine and the Middle East, remain top of mind for many investors. However, despite these uncertainties, central banks have started to cut interest rates since inflation has been brought back to their target level. This has led to a rebound in bond and stock markets, as some of the expected rate cuts have already materialized. The key question for investors is whether it is time to get ready for the next up-cycle, as they consider various macro scenarios and deal with legacy pain from the recent down-cycle.

In conclusion, the significant allocation to European stocks in January 2025 reflects a combination of factors, including expectations of Federal Reserve rate cuts, China's economic stimulus, improving growth expectations, and concerns about a disorderly rise in bond yields. This shift in sentiment has created opportunities for investors to benefit from the attractive valuation ratios and potential growth in specific sectors and companies within the European market. Despite geopolitical uncertainties, the positive outlook for European stocks makes them an attractive investment option for investors looking for opportunities in 2025.