Positive Momentum for European Assets

In this article, our Group Chairman, Alain Freymond, and Group CEO, Ahmad Saidali, provide valuable insights on the moderate growth of the eurozone economy, the impact of the ECB's recent monetary policy shifts, and the outlook for interest rates and inflation.

ECB rate cuts likely to accelerate

The eurozone economy has recorded two consecutive quarters of moderate growth. Despite the change in the ECB's monetary policy in June, we do not anticipate an acceleration of the economic situation in the coming quarters. Leading indicators remain very uncertain, and household confidence is still extremely fragile. Consumers have not yet fully grasped the effects of the ongoing rate adjustment; they do not yet realize that the decline in inflation and rate adjustments will contribute to an improvement in their purchasing power.

We expect household confidence to strengthen with a new interest rate cut. It will also react positively when the CPI drops below +2% in the coming months. The ECB has already increased the size of its second rate cut (-0.5%) compared to June (-0.25%) and seems ready to orchestrate further cuts consistent with the economic outlook. If inflation quickly falls to +1.8%, the ECB will likely implement two more rate cuts in 2024 and additional ones in 2025 to reduce the current 200 bps rate differential.

The long end of the euro yield curve has already fallen from 2.65% to 2.1% in a few weeks. However, there are still capital gains to be captured if our expectations for further long-term rate cuts materialize, though they are likely to be limited to an additional 50 bps. The euro could eventually benefit from the growing yield differential with the Swiss franc, now at 170 bps. European securitized real estate is also attractive, with an average yield of 5.7% (EPRA Nareit eurozone), while equities continue to benefit from a favorable relative PE for 2025 (13.3x) compared to the United States (20.8x).