By Tom Stevenson, Investment Director, Fidelity International:
“Sometimes politics seems irrelevant to investors. Markets can shrug off apparently big geo-political events – war and other upheavals can even boost the economic outlook. Over the three months since the US Presidential election – and this week in particular, however – politics seems to matter again.
“Germany is now in the spotlight following a general election this weekend. Investors are now watching whether Friedrich Merz, the man set to lead Germany after winning a snap election, can boost Germany’s economy and defence spending as America demands that Europe steps up to shoulder the burden of its own defence.
“The weakening of the trans-Atlantic pact of the post-war years isn’t necessarily bad news for investors. Markets are now focussing on a new environment of higher spending and greater independence for Europe. Defence-related shares have been the big winners from a region-wide market rally. BAE Systems has doubled in value over the past three years.
“The other big winner so far this year has been another previously underperforming market. Chinese shares starting rallying last autumn when Beijing signalled a renewed commitment to economic stimulus, but the rally accelerated last month when DeepSeek showed that there is a potential Chinese alternative to US artificial intelligence dominance. At the same time, Donald Trump has appeared to soften his tariff rhetoric when it comes to China.
“For the first time in years, the country looks investable again. The rally in Chinese shares has started to narrow one of the biggest valuation differentials, that between US and Chinese shares. The average multiple of earnings at which Chinese shares trade has risen by 4 points over the past year.
“Similarly, UK shares have rallied recently, although they remain heavily discounted compared to US equities. For years, American shares have been more expensive, justified by faster growth. However, that now looks less certain. While US corporate earnings grew by 13% in the year to the end of 2024 expectations for 2025 are slipping. Not so in the rest of the world, where forecasts are edging higher. Perhaps the narrowing of valuations still has a way to run.”
