Whilst geopolitics is creating uncertainty across all markets, there are dynamics that we believe maintain Europe as a compelling market for active investors.
After more than a decade in which capital flowed relentlessly toward US markets – partly through the growth of global fund allocations – political uncertainty has begun to create concern among those investors who are increasingly uncomfortable with the concentration within their portfolios. That does not make Europe the only beneficiary of possible reallocation, nor does it suggest the region is without its challenges. Nevertheless, as we saw in the first two months of this year, any such shift could provide a meaningful tailwind for European markets.
Europe has limited dependency on a single economic outcome
The starting point for any assessment is valuation. Relative to many other markets, European equities trade closer to long-term average valuations and at a significant discount to the US. Market concentration within European equities is notably lower – with the top ten companies representing 15% of the index compared to 43% in the US – while revenue exposure is increasingly global, with less than half of European company revenues derived domestically. This latter point limits dependency on any single economic outcome.
The geopolitical backdrop has added both complexity and, somewhat unexpectedly, structural opportunity. The shift in US policy – across trade, defence, and the broader architecture of global cooperation – has acted as a catalyst for Europe to reassess its strategic position. This is manifesting in increased defence spending, a sharper focus on energy security and supply chain resilience, and a more active fiscal stance, most visibly in Germany and at the EU level. These are not merely short-term responses to immediate pressures; they represent the early stages of a structural investment cycle likely to persist for years. Elevated uncertainty – whether from tariffs, Middle Eastern tensions, or US-China competition – is also contributing to higher market volatility. For investors focused on business quality rather than short-term headlines, these periodic dislocations can also lead to opportunities.
Structural growth challenges remain in Europe’s core economies
The investment case for Europe is nuanced. On the positive side, valuations are reasonable, structural investment is accelerating across defence, electrification, and digital infrastructure, and the banking sector is more profitable and better capitalised than at any point since the financial crisis. Nevertheless we are also alert to the challenges that exist: structural growth concerns persist, particularly within core economies such as Germany, the UK, and France; regulatory burdens weigh on competitiveness in some industries; and energy costs continue to run higher than in the US, with particular relevance for industrial sectors and countries where electricity costs are highest. Global revenue exposure, while generally a benefit, also creates transmission risk from weakness in China or any US slowdown.
That said, many of these issues are well understood and arguably reflected in prices. It is also worth noting that the European Commission appears increasingly willing to act in defence of its manufacturing base. The steel industry offers a recent example, where measures to improve the competitiveness of European producers and restrict imports signal a broader shift toward more active industrial policy.
Continued scope for active selection
Sector dispersion is significant and increasing. Financials – particularly banks – remain, in our view, a compelling opportunity. Higher interest rates, improved capital positions, industry consolidation, and a resumption of meaningful capital returns have fundamentally altered the earnings profile of European banks, while valuations remain undemanding relative to that improved backdrop. Electrification and energy infrastructure offer a multi-decade investment theme, driven by decarbonisation and rising electricity demand – with AI data centres increasingly contributing to the latter – creating sustained capital expenditure into grid, generation, and storage infrastructure. Europe also holds critical positions across the semiconductor value chain, and industrials tied to infrastructure, defence, and supply chain investment are well placed as the broader capex cycle gathers momentum.
Elsewhere, the picture is more mixed. Consumer sectors face a difficult combination of weak sentiment and structural pressure, while telecoms and parts of the chemicals sector remain constrained by regulatory frameworks or limited pricing power. AI-related narrative has also driven sharp de-ratings in certain companies – sometimes without any corresponding deterioration in underlying earnings – creating selective opportunities for investors willing to look through short-term noise.
Investing with discipline and a long-term perspective
To navigate this environment, we have applied our investment approach consistently – one that has been tested across many market cycles. We run a concentrated, high-conviction strategy investing in approximately 30 to 40 stocks, built from the bottom up through deep fundamental research. We are style agnostic – not constrained by growth or value classifications – and focus on identifying companies capable of generating returns on capital above their cost of capital over time. Portfolio construction is disciplined, utilising a risk model to minimise unintended factor exposures and ensure that stock-specific conviction drives active risk.
We are not in the business of believing that we can accurately predict macro-outcomes, but we continually analyse market trends and business performance to assess how companies may be affected, adjusting positioning when the evidence warrants it. A recent example was our decision to increase oil and gas exposure following the outbreak of conflict in the Middle East, reflecting a changed outlook for company free-cash-flows due to energy prices, and the recognition that many countries will need to build/rebuild strategic reserves regardless of when the conflict resolves. The aim, as always, is to identify businesses with the quality and resilience to compound value through cycles, and where appropriate to use periods of market dislocation to build positions at valuations that make sense over the long term.
Geopolitical uncertainty, and most pertinently the closure of the Strait of Hormuz, continues to cloud the outlook for many industries. The range of outcomes may be seen as broadly bimodal - either disruption eases and trade normalises, or prolonged closure/uncertainty feeds inflation and weighs on growth. Even so, as discussed, we believe there are compelling structural themes to invest behind, and that market dislocation may continue to benefit active managers that are thoughtfully positioned. Together with opportunities for capital flow rebalancing, we believe European Equities remain an environment where a patient, research-driven approach can add real and lasting value.
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