Is Europe the Next Big Trade? BlackRock CEO Thinks So

***This is not financial advice. The information provided is for informational and educational purposes only.***

The World Economic Forum (WEF) in Davos is where the world's top business leaders, policymakers, and economists gather to set the tone for the global economy. But according to BlackRock CEO Larry Fink, the best trade might be to bet against the consensus coming out of Davos. At this year's WEF, Fink called investing in Europe a "counter-trade" and added, "Always go against Davos and you'll make a lot of money." That's a bold claim. But is he right? Is Europe the next big trade that everyone is sleeping on? Let's break it down.

Why Larry Fink Thinks Betting Against Davos Works

Larry Fink isn't just making conversation - he's signaling a classic contrarian investment strategy. Davos tends to reflect the prevailing consensus. If attendees are bearish on Europe, that negativity may already be priced into the market, making it a prime opportunity for contrarian investors to step in.

This thinking follows the famous Warren Buffett principle: "Be fearful when others are greedy, and greedy when others are fearful." Historically, some of the biggest investing wins have come from taking the opposite bet when market sentiment is overwhelmingly one-sided:

• 2008 Financial Crisis: Investors who bought U.S. stocks at the depths of the crisis made massive returns over the next decade.
  
• 2020 Energy Collapse: Oil prices went negative, but by 2022, energy stocks were the best-performing sector.
  
• 2022 Tech Sell-Off: Big Tech got crushed, but those who bought AI-driven stocks before the ChatGPT boom saw triple-digit returns.

Now, with Europe facing headwinds, is this the next contrarian opportunity?

Why Europe Is Out of Favor Right Now

If there's one thing investors love, it's momentum - and Europe hasn't had much of it lately. Here's why global investors have been avoiding European assets:

1. Sluggish Economic Growth: Europe's GDP growth has lagged behind the U.S. for years. According to IMF projections, the Eurozone economy is expected to grow just 0.9% in 2024, compared to 2.1% in the U.S.

2. High Interest Rates are Hurting Consumers and Business: While the Federal Reserve has hinted at rate cuts in 2024, the European Central Bank (ECB) has been slower to react. High borrowing costs make it harder for businesses to expand and homebuyers to purchase properties, which slows economic activity.

3. Geopolitical Risks: Europe is closer to global conflicts like the Russia-Ukraine war, which impacts energy prices and trade stability. Additionally, political uncertainty in key economies like Germany and France has made investors wary.

4. Over-Reliance on China: Many of Europe's biggest companies, including luxury brands (LVMH, Hermes), automakers (Volkswagen, BMW), and industrials (Siemens, Airbus), have significant exposure to China's slowing economy.

Despite these concerns, there are signs that Europe could be one of the best trades of 2025.

Why Europe Might Be the Next Big Trade

If everyone is bearish on Europe, it means that a lot of the bad news is already priced in. That creates an opportunity for upside surprises. Here's why Europe could be a contrarian play:

1. Interest Rate Cuts are Coming

• The ECB is expected to start cutting rates in mid-2025, possibly before the Federal Reserve.
  
• Lower rates would boost European stock markets and make borrowing cheaper for businesses and consumers.

2. Cheap Valuations Compared to the United States:

• European stocks are trading at a discount relative to U.S. equities.
  
• The Euro Stoxx 50 trades at around 12-14x earnings, while the S&P 500 trades at 19-20x earnings.

3. The Weak Euro Could Boost Exports:

• A weaker euro makes European exports more competitive globally, helping luxury, industrial, and manufacturing sectors.
  
• Companies like LVMH, Airbus, and Siemens could benefit from higher international demand.

4. Private Equity and Real Assets Are Attractive

• European real estate, infrastructure, and distressed assets could provide long-term value as the economy rebounds.
  
• Private equity firms are already snapping up undervalued European assets.

5. Sector Strengths in Key Industries

Certain European sectors are globally dominant and relatively undervalued:

• Luxury Goods - LVMH, Hermes, Richemont
  
• Industrial Giants - Siemens, Airbus, Schneider Electric
  
• Energy & Commodities - Shell, BP, TotalEnergies
  
• Financials - Deutsche Bank, BNP Paribas, Santander

With a shift in sentiment, these sectors could outperform over the next few years.

How to Invest in Europe: Strategies to Play the Trade

If you're looking to follow Fink's contrarian bet, here are some ways to gain exposure to European markets:

1. ETFs for Broad Exposure

• Vanguard FTSE Europe ETF (VGK) - Diversified exposure to European stocks.
  
• iShares MSCI Eurozone ETF (EZU) - Focuses on Eurozone stocks.
  
• SPDR Euro Stoxx 50 ETF (FEZ) - Tracks the top 50 European companies.

2. Individual Stocks with Strong Upside

• LVMH (LVMUY) - Luxury leader with global pricing power.
  
• ASML (ASML) - The backbone of semiconductor manufacturing.
  
• Siemens (SIEGY) - Industrial powerhouse benefitting from automation and AI.
  
• Airbus (EADSY) - Leading Boeing in aviation orders and growth.

3. Bond & Currency Plays

• European government bonds could rise if the ECB cuts rates aggressively.
  
• Going long on EUR/USD could work if capital starts flowing back into European assets.

Risks to Consider Before Jumping In

No investment is without risk. Here's what could go wrong:

• The ECB could delay rate cuts, keeping European stocks under pressure.
  
• Geopolitical risks in Ukraine or elsewhere could rattle markets.
  
• China's slowdown could continue to hurt European exports.
  

The U.S. may remain the stronger market, leading investors to favor domestic equities instead.

Still, for investors willing to take a contrarian stance, Europe could be the next big trade if sentiment shifts.

Final Thoughts: Should You Bet on Europe?

Larry Fink's call to go against Davos might not be far off. When investor sentiment is overwhelmingly negative, markets tend to overcorrect, creating opportunities for those willing to look beyond the noise. With ECB rate cuts on the horizon, attractive valuations, and strong sector leaders, European stocks could stage a comeback in 2025.

For those looking for an undervalued play in global markets, Europe might be the contrarian bet worth considering.

The content in this article provides general consumer information. It is not legal advice, financial advice, or regulatory guidance.