German election outcome could fuel Europe stock rally, says deVere’s Green

Investing.com -- Germany’s recent federal election could catalyze a significant rally in the country’s stock market, particularly benefiting small and mid-cap companies. The potential surge could also influence a wider European equity boom, according to Nigel Green, CEO of independent global financial advisory and asset management firm, deVere Group.

The expectation is that if Conservative front-runner Friedrich Merz forms a coalition with the Social Democratic Party and possibly the Greens, economic reforms and a possible relaxation of the debt brake could be on the horizon. This could set the stage for a sustained bull run in the market.

The DAX Index is already close to record highs, indicating growing optimism. A change in fiscal policy allowing for increased government investment could be a significant factor, especially for sectors such as defense, infrastructure, and real estate. Smaller companies, more sensitive to domestic policy changes, are likely to see the most benefits.

deVere Group anticipates that this shift could lead to a prolonged period of outperformance in German equities. "Investors are increasingly viewing Germany as the epicenter of the next European market boom," Nigel Green stated. "The election outcome could unlock an unprecedented level of investment activity."

Notably, European stocks are currently outperforming their U.S. counterparts for the first time in nearly a decade. The Stoxx Europe 600 has seen a 5.6% increase since Donald Trump returned to the White House, surpassing the 2.5% gain of the S&P 500 and the Nasdaq Composite’s 2.2% rise.

Several factors are contributing to this momentum. One is Trump’s decision not to escalate tariffs against the EU, which has lifted a major burden for European markets. Additionally, the potential for peace talks in Ukraine is reducing geopolitical tension and boosting investor confidence.

Further fueling the rally is the European Central Bank’s commitment to interest rate cuts. In contrast to the U.S. Federal Reserve’s cautious approach, the ECB is decisively lowering rates to stimulate growth, making European assets increasingly attractive.

A key factor in this rally is valuation. European stocks have traditionally traded at a significant discount to their U.S. counterparts, a gap that is becoming harder to justify given the improving macroeconomic landscape.

Nigel Green added, "Even after recent gains, high-quality European companies remain significantly undervalued relative to their American peers. The increasing recognition of this mispricing is triggering a wave of capital inflows, a trend that could accelerate as confidence builds."

Another significant shift is a global investment portfolio rotation. For over a decade, U.S. tech stocks have dominated the market. However, rising interest rates and growing regulatory scrutiny are prompting investors to reassess their positioning. As a result, capital is flowing into regions that offer compelling opportunities beyond the crowded tech trade. Europe, with its attractive valuations and central bank support, is becoming a key beneficiary.

While some market observers argue that this European rally is temporary and that the U.S. will regain its dominance once the Federal Reserve begins cutting rates, this view overlooks a fundamental change in market conditions.

Historically, European equities have been hindered by economic stagnation and political uncertainty. Today, those obstacles are diminishing, opening the door for potentially sustained outperformance.

"A decisive result in the German elections, paving the way for economic reform, could trigger a significant equity rally—one that extends beyond Germany and helps reshape Europe’s investment landscape," concluded Green.

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