By Francis Muyshondt

Mahmood Pradhan, Global Head of Macroeconomics at Amundi Investment Institute, sees a lot of opportunities in Europe, although there is certainly still work to be done on the Old Continent and trade tariffs could still throw a spanner in the works. At the same time, he also put forward some new safe havens, including German government bonds. US Treasuries are not one of them. India can also count on his support, partly because demographics are favourable and a there is a lot of potential upside from reforms.

Market recovery

Today, major European market indices are quoting at or close to records. However, after US President Trump's announcement of high trade tariffs on Liberation Day on 2 April, things looked completely different as stock markets nearly imploded in a matter of days. How does macroeconomist Pradhan perceive the strength of equity markets? 'I am a bit surprised by the strength of the US market recovery because the trade war is not off the table yet. Negotiations are still ongoing and there are still threats of higher tariffs on European cars, steel and aluminium, for example. Yet there is now a clear belief in the market that tariffs will not settle at the high levels put forward during Liberation Day. Such high trade tariffs would have too severe an impact, including on economic growth in the US and in China,' he lists.

The economist, who among other things earned his stripes at the IMF and worked with current ECB president Christine Lagarde, assumes that trade tariffs will end up around 10% although that still seems optimistic today. At the same time, he is confident that markets will constrain the current US administration as stock markets will continue to highlight the economic consequences of the trade war and may change the president's mind. From the Republican party or US agencies like Congress or the court system, he said, one should not expect effective constraints, compared to the market.

Shift

Meanwhile, the international investment world seems to be slowly reorienting itself. 'An important, albeit still marginal, trend is the shift of investment funds away from the United States towards Europe. This move is relatively small in absolute terms, but still striking within a context where the US equity market has dominated the global investment landscape for decades. Even small rearrangements from the US can lead to substantial inflows into European markets, given the huge concentration of global allocations in US assets,' Pradhan argues.

Investors today, moreover, increasingly see Europe as a way to better diversify portfolios structurally. In this regard, the attractiveness of European markets is not purely based on valuation, but also on increasing political and fiscal room for manoeuvre in core countries such as Germany. A major boost, according to the macroeconomist, comes from Germany, where a policy reversal has taken place. The suspension of the debt brake and increased investment in infrastructure and defence are widely interpreted as signs of a more proactive fiscal policy. 'For investors, it is clear: fiscal expansion by a heavyweight like Germany inspires confidence - even if the long-term effects for the rest of the eurozone are still uncertain,' Pradhan said.

New safe havens

Fixed-income markets are also showing a changing picture. The US government bond market, once the ultimate haven for risk-averse investors, is disappointing. Consequently, disappointing performance and growing concerns about the sustainability of the US debt position are depressing sentiment. 'The traditional safe haven status of US Treasuries is under pressure,' Pradhan warns. 'Markets are beginning to question whether the US fiscal path is sustainable in the long term. And that creates capital shifts.' European bonds - especially German Bunds - are therefore regaining their attractiveness, he stressed. 'Whereas for years they offered minimal or even negative returns, now their relative stability is a major plus in a volatile environment.' Pradhan states unequivocally that the long-term sustainability of the US budget may be a bigger issue than US import tariffs, which are drawing all the attention today.

Besides bonds, there are also clear bright spots within European equity markets. Sectors such as defence and finance performed particularly well. 'The expected increase in defence spending has already been partly priced in, but structurally this remains a growth story,' he points out. 'Moreover, we are seeing remarkable re-rating among European banks. Historically, those stocks were heavily undervalued, but that is starting to tilt as profitability improves.'

Two foundations

Amundi says investors' strategic reorientation towards Europe rests on two fundamentals: diversification and valuation. 'Too many portfolios have long been overly dependent on the US, especially the technology sector. That is simply poor risk management,' says Pradhan. 'The reallocation towards Europe is a logical consequence of the need for a healthier geographical balance. European stocks are also priced more attractively than their US counterparts. Especially in light of the skyrocketing valuations within the so-called MAG-7 in the US. And that presents opportunities for investors with a long-term horizon.'

Yet Pradhan acknowledges that optimism about Europe has limits. 'The big question is whether Europe follows through on structural reforms. Reports from Draghi rightly point to an over-regulated, fragmented landscape that frustrates investment. Something needs to be done about that. What Europe needs is political decisiveness, and a more harmonised single market would significantly increase the attractiveness of European assets.'

Monetary policy

The European Central Bank (ECB) is currently in a comfortable position regarding the inflation picture, especially when compared to other central banks, the head of Macro at Amundi continues. 'The ECB is comfortable about inflation at the moment. And has much more policy room than before to cut interest rates. We expect them to reduce the policy rate to around 1.5%.' What also makes him positive is how Europe has weathered successive shocks - from the pandemic to the war in Ukraine. 'We have had very large real economic shocks. What European policymakers, including the ECB, have done deserves more recognition: they have effectively protected the financial system. Thanks to measures such as moratoria and temporary relaxation of capital requirements, no banking crisis arose. And we know from experience that if there is a crisis in the financial sector, the recovery takes many years.'

In this light, the ECB also seems less concerned about the euro exchange rate or possible negative exchange rate effects of an interest rate differential with the US. 'Already last year we said that the ECB can cut more than the Fed. While US import tariffs will depress growth - including in the US itself - in Europe, the share of US imports in consumption are limited. Even if the EU decided to retaliate, as is currently being discussed, the effect on inflation will remain marginal.'

China and Europe

Yet Pradhan would also like to point out that the European Union faces a complex challenge in its economic relationship with China. 'There are no simple rules of thumb to apply to China,' he argues. 'It is a balancing act between competition, strategic interests and realpolitik. China has a significant cost advantage in many sectors, often partly due to state aid. This leads to concerns in Europe about unfair competition. At the same time, the EU is not taking a black-and-white approach in its trade policy. Take the example of solar panels. There, the EU has deliberately imposed no trade barriers, recognising that there is hardly a viable European solar panel industry to protect. On the other hand, it does impose import duties on Chinese electric vehicles, as Europe sees that sector as strategically important and wants to counter unfair competition there. That's pragmatism.'

According to Pradhan, this shows that the EU does not have a general doctrine regarding Chinese imports, but makes trade-offs on a sector-by-sector basis. 'It is not an all-or-nothing policy. It looks at where Europe has a strategic interest and where European industries can realistically compete.' In doing so, he also distinguishes between ordinary trade issues and those falling under strategic autonomy or national security. 'That's another story. Sectors such as cybersecurity or certain technologies fall into a category where it is not just about competitiveness, but about maintaining its own capacity and independence. These are legitimate concerns.'

European investments

For Pradhan , there is no question: Europe currently offers interesting investment opportunities - both in bond and equity markets. 'Europe combines attractive yields with relatively low volatility and, especially for international investors outside Europe, offers an interesting risk-reward ratio. The euro remains fairly stable and we have little concern about a significant weakening of the currency. The dollar, on the other hand, is more vulnerable, in our view. That makes Europe an attractive destination for bond investors globally.'

For equity investments too, Pradhan sees momentum building in Europe, not least because of valuations. 'We are seeing more and more arguments to reduce exposure to US equities somewhat. European stocks are more attractively valued, especially considering the high multiples in US growth sectors. 'We target European companies that are relatively immune to the impact of US import tariffs - companies with a more domestic focus,' he explains. 'Indeed, Europe exports more to the US than to China, so we are wary of companies that lean heavily on the US market. We look sector by sector at where the risk is lowest.'

Despite Europe lagging behind in technology and artificial intelligence, Pradhan actually sees opportunities there in the long run. 'AI will eventually affect everyone, no matter where you start. It is inevitable that Europe will also follow that wave. That offers medium-term opportunities, especially in sectors that can implement or integrate AI solutions.'

India and China interesting

He additionally sees opportunities in Asian markets. 'We are very positive about India. The country is relatively little exposed to international shocks and has a huge domestic market. And India is already attracting a lot of foreign investment while the potential to implement many more reforms could further increase capital inflows.' According to Pradhan, demographic prospects are a crucial advantage in this regard. 'If you look at the world, there are really only two regions that do not have a problem with ageing: India and sub-Saharan Africa. India has a young population, and that gives it a long-term advantage that Europe simply does not have.'

That does not mean India does not have challenges. 'Infrastructure remains a major bottleneck. And despite favourable demographics, unemployment among the highly educated is worryingly high. But what makes India unique is its huge domestic savings momentum and active retail participation in equity markets. While European savers park their money in deposits, many Indian families-even with small amounts-invest in equities.'