Nuveen’s Laura Cooper, head of macro credit, shares her insights on why Europe is struggling in the shadows of US exceptionalism and discusses the opportunities for investors amid a challenging 2025 backdrop. 

Laura Cooper (pictured) at Nuveen, a $1.2 trillion global asset manager, recently discussed the headwinds of fiscal uncertainty facing the continent, its weak structural growth and trade policy uncertainty. While there are few catalysts to spur growth in 2025, Cooper believes that there are opportunities for investors to stay selective in portfolios.

“The euro area averted a recession in 2024 thanks to resilient labour markets and the European Central Bank (ECB) beginning to exit restrictive policy rates,” Cooper said in a note. “The central bank is poised to extend its rate-cutting cycle through 2025, with the deposit rate likely to reach 1.75 per cent by year-end. While looser monetary policy would be a tailwind to growth, uncertainty – stemming from US tariffs, fresh elections and lack of a fiscal impulse – is likely to weigh on sentiment.” 

1. Bracing for tariffs under Trump 2.0
“The new US administration has Europe in its sights as a target for trade tariffs. Heightened trade policy uncertainty is set to weigh on confidence in the region and subsequently shave 0.3 to 0.5 per cent off real GDP growth in 2025, underpinning our forecast of subdued 1 per cent growth in 2025,” Cooper said.

She highlighted how sentiment in Germany is already depressed amid high energy costs, geopolitical tensions and a structural slowdown in manufacturing activity. “The risk of US tariffs could further damage confidence, tipping Germany into a mild recession at a time of constrained fiscal capacity given uncertainty from the upcoming election,” she continued.

Cooper expects European equities to underperform the tech-led US market. “This warrants a selective approach with European cyclicals, while healthcare, technology and energy are poised to benefit from the secular trends around power generation, decarbonisation and automation,” she said.

“For European corporate credit, trade uncertainty alongside margin and earnings pressure from higher interest costs and wages will likely see credit metrics deteriorate, albeit from a healthy position,” Cooper added. Her preference remains in sectors with stable earnings such as consumer staples, communication and select financials, which have attractive valuations and strong balance sheets. “Despite trade concerns likely to spur volatility and modest spread widening, high carry should drive cash into European credit markets, with the potential for positive excess returns,” she said.

Nadège Dufossé at Luxembourg-headquartered multi-asset manager Candriam and Philip Saunders and Sahil Mahtani at asset manager Ninety One also favour European credit over the US in 2025.

2. Making sense of Germany’s limited fiscal flexibility
Cooper highlighted how Germany has been under pressure since the invasion of Ukraine and the loss of cheap Russian gas for its energy-intensive industries. As a result of the country decommissioning its nuclear fleet over the past decade, it has few alternatives. “High energy costs and increasing direct manufacturing competition from China mean structural challenges are likely to persist, heightening the need for fiscal support,” she continued. “With inflation progressing to 2 per cent through the year, the ECB poised to extend its easing cycle and growth pressures remaining, the 10-year German bund yield could trade closer to 2.0 per cent.” 

3. Positioning in the periphery
Peripheral countries such as Spain, Cyprus and Greece have seen strong growth with further tailwinds ahead. Cooper believes that these countries alongside Italy should be helped by large Next Generation EU spending that is largely backloaded for 2025 to 2026. “Alongside prospects of ECB rate cuts and lower German bond yields, this bodes well for peripheral bonds’ total return performance,” she said.

4. Preparing for more French uncertainty
“Another round of French parliamentary elections loom in 2025 amid limited support for the current minority coalition from parties across the political spectrum,” Cooper continued. “Persistently high fiscal deficits and deteriorating debt dynamics imply mildly higher net issuance in 2025, with ongoing reliance on foreign investors. International investors in French debt may seek higher yields to compensate for the political risks,” she said. “A lack of political space for Prime Minister Bayrou to implement stronger fiscal consolidation raises downgrade risk for France into the single A rating bucket, which could trigger meaningful outflows and outsized spread widening.” While Cooper is underweight in French government bonds, should this scenario materialise, she would use the opportunity to tactically cover shorts.

5. Unlocking value in UK gilts
Cooper pointed to the UK macro backdrop facing the burden on corporates from tax hikes embedded in the 2024 budget and concerns about further increases. She thinks 100 basis points of interest rate cuts or more are likely in 2025. “Together these factors should feed through to lower gilt yields, with the 10-year yield likely to move back below 4 per cent in the second half of 2025,” Cooper said.