The fast view
- After years in the global investment wilderness, European equities are starting to show early signs of revival.
- Long dismissed as a value trap – burdened by anaemic growth, political dysfunction, and rigid policy frameworks – the region now presents a markedly different picture.
- While low valuations remain a compelling foundation, an increasing set of pro-growth signals from policymakers is starting to shift the narrative.
- Although recent tariff escalations and euro strength may present a low- to mid-single digit drag on FY2025 earnings, the broader structural story outweighs these short-term headwinds.
- What we are witnessing is the early emergence of a more investable, pro-growth Europe.
Where we are today
Sentiment is improving from a deeply depressed base. After five years of sustained outflows totalling US$105 billion1, the most recent data shows a reversal, with inflows returning to both active and passive large-cap strategies. Although only US$202 has returned for every US$100 lost since the onset of the Ukraine conflict, the change in direction is notable – and may mark the beginning of a long-awaited repositioning. Foreign claims on US assets have ballooned from under US$5 trillion in 2010 to US$263 trillion today. A modest rebalancing could unlock significant capital for under-owned regions like Europe. For the first time in years, Europe is positioning itself not just as cheap – but investable.
Figure 1: Cumulative US$105 billion five-year outflow
Source: Ninety One, Morningstar Asset Flows, May 2025, USD.
Shaped by austerity, cast in negativity
The roots of Europe’s historical weakness lie in its post-global financial crisis (GFC) policy missteps. While the US deployed massive fiscal stimulus, Europe turned inward – choosing austerity, tighter regulation, and fiscal conservatism. As a result, nearly half the market, particularly banks, utilities, energy, and telecoms, entered a period of deleveraging and earnings suppression. From 2007 to 2019, European corporates delivered a cumulative 0% earnings compounded annual growth rate (CAGR). After nearly a decade of no earnings growth, European equities became synonymous with ‘ex-growth’ and that label has proved difficult to shift, despite 2007-19 being the historical anomaly. Not surprisingly, Europe’s share of the MSCI ACWI collapsed from 27.6% in 2009 to just 13.6% by 20244, cementing its status as a structural underweight in global portfolios.
Figure 2: European average nominal EPS growth
Source: I/B/E/S, Datastream, Ninety One, Goldman Sachs Global Investment Research, as at December 2024.
Importantly, from 2019 to 2026E, European equities are expected to deliver a 6% index earnings per share (EPS) CAGR – despite absorbing shocks including the pandemic, war in Ukraine, surging energy costs, inflation, regulatory headwinds, and political volatility. That resilience has gone largely unrewarded. Today, the Stoxx 600 equity risk premium versus the MSCI World sits near multi-decade highs. European equities are trading close to the steepest relative discount to US peers in 35 years.
EU policy is catalysing real change
A beautiful panic
What has been missing is a clear catalyst – and now one appears to be forming. A quiet but profound shift is underway in EU policy thinking. In September 2024, Mario Draghi (the man who ‘saved’ the euro) issued a blueprint for EU industrial strategy under the rallying cry “change, or die.” He identified €8455 billion of critical infrastructure investment needed by 2040 to modernise Europe’s outdated grids, transport links, and industrial backbone. At the same time, growing geopolitical instability has forced a rethink of defence policy. Meeting NATO targets could require an additional €60 billion annually (based on member state commitment of 2% of GDP), with direct benefits to Europe’s globally competitive defence sector, including names like Rheinmetall and Leonardo.
The pivot accelerated in March 2025 with a wave of political pressure: Draghi’s Financial Times op-ed accused the EU of self-sabotage through protectionist missteps; JD Vance questioned the EU’s cohesion on stage in Munich; polling gains for hard-right parties in Germany and the UK stirred alarm in centrist circles; and the sands of geopolitics continued to shift further under Trump 2.0. This cocktail of events triggered what we call a ‘beautiful panic’ – a recognition among EU powerbrokers that growth can no longer be deferred.
The pro-growth agenda
The result has been a sharp pivot toward a coordinated, pro-growth agenda. From 2009 to 2024, the EU ran cumulative deficits of just €2.5 trillion – compared to €14 trillion6 in the US. That gap is no longer politically tenable. Germany is central to this shift. It is uniquely positioned with debt-to-GDP of c.60%7, and is now stepping forward. Berlin’s proposed €500 billion infrastructure fund, equivalent to 11.6% of GDP8 over 12 years, alongside reforms to its debt brake and sharply increased defence spending, could deliver a fiscal impulse of 3-4% of GDP by 2027, in a US$4.7 trillion economy that’s around US$140 billion9 incremental annual spend.
The question now is whether this ‘beautiful panic’ spreads. If it does, and the EU follows through with real supply-side reform, then what we’re witnessing is not just a short-term bounce, but the early stages of a new European growth regime. With more reforms than we have seen in decades and bolder political decision making, we already believe there is line of sight into accelerating GDP and earnings growth for Europe into FY26.
Cyclical factors looking up
In addition to the headline structural tailwinds which are falling into place, there are supportive cyclical factors in the background.
Strengthening corporate balance sheets and capital returns
Corporate balance sheets are healthier than at any time in the past decade. Banks, long the problem child, are now over-capitalised, regulators more permissive, and shareholder distributions via buybacks and dividends are rising. M&A is reawakening, with UniCredit’s bid for Commerzbank signalling a return to potential cross-border consolidation for the first time in decades.
Monetary easing
Monetary policy is also supportive. In late 2024, central banks began cutting rates at a pace not seen since the GFC – yet this time, not in response to crisis. We are likely to see further rate cuts ahead, especially given tariff related uncertainty. With 74% of European corporate debt priced on floating rates10, the earnings sensitivity to policy easing is immediate. Consumer strength adds another layer: unlike their US peers, European households have preserved pandemic-era savings and are benefiting from rising real incomes, creating potential upside to domestic demand and a positive credit impulse.
Priced for a rebound
Valuations remain compelling. The Stoxx 600 equity risk premium (ERP) versus the MSCI World is shown below in Figure 3. This represents the extra return that investors demand for holding European equities, typically for taking additional perceived risk, which fits with the ex-growth narrative discussed in the paper. The ERP is near multi-decade highs, meaning European equities are heavily discounted vs. global stocks. This profoundly skews the risk/reward in favour of those willing to take a contrarian position. With valuations this low, downside may be cushioned (so much bad news is priced in), while the upside from even a partial normalisation in perceptions, or modest return to growth, could be considerable.
Figure 3: Stoxx 600 equity risk premium relative to MSCI World
Source: Merril Lynch. December 2024.
Conclusion
After being out of favour for much of the past decade, momentum is starting to build behind Europe. The EU’s shift toward a pro-growth strategy, coinciding with interest rate cuts, is highly significant. This reframes the opportunity set for active managers, with increasing breadth for stock-pickers in domestically leveraged names – banks, industrials, infrastructure, utilities – that stand to benefit directly from fiscal expansion and rising investment.
While the backdrop is constructive, there are potential risks to be mindful of, including shorter-term tariff risks to earnings, return to higher inflation, any escalation in Ukraine, European energy security or disruptive geopolitics. However, Europe has been dealing with these issues for some time. A sudden retrenchment in German fiscal policy could certainly be disruptive for wider European growth prospects, but momentum at the time of writing is very much expansionary and pro-growth. With valuations today near historical lows, coupled with our view that much of the bad news, both past and present, is already priced in, the risk/reward for long-term investors looks compelling, with further upside risks possible from mooted incremental deregulation or genuine supply side reform such as capital markets union.
We believe Europe is at the beginning of a structural re-rating. The political centre has been forced to reckon with stagnation – and is finally responding. Fiscal capacity is being mobilised. Corporate fundamentals are solid. The macro backdrop is supportive. It’s time to move overweight Europe.
1 Ninety One, Morningstar Asset Flows, April 2025, USD.
2 BofA Global Fund Manager Survey, April 2025.
3 Bloomberg, April 2025.
4 Ninety One, MSCI, Factset, June 2025.
5 https://commission.europa.eu/topics/eu-competitiveness/draghi-report_en
6 Bloomberg, April 2025.
7 www.imf.org.
8 The Potential economic impact of the reform of Germany’s fiscal framework - European Commission
9 Bloomberg, April 2025.
10 Deutsche Bank, December 2024.
General risks. The value of investments, and any income generated from them, can fall as well as rise. Costs and charges will reduce the current and future value of investments. Where charges are taken from capital, this may constrain future growth. Past performance does not predict future returns. If any currency differs from the investor’s home currency, returns may increase or decrease as a result of currency fluctuations. Investment objectives may not necessarily be achieved; losses may be made. Target returns are hypothetical returns and do not represent actual performance. Actual returns may differ significantly. Environmental, social or governance related risk events or factors, if they occur, could cause a negative impact on the value of investments.
Specific risks. Geographic/Sector: Investments may be primarily concentrated in specific countries, geographical regions and/or industry sectors. This may mean that, in certain market conditions, the value of the portfolio may decrease whilst more broadly-invested portfolios might grow. Currency exchange: Changes in the relative values of different currencies may adversely affect the value of investments and any related income. Derivatives: The use of derivatives is not intended to increase the overall level of risk. However, the use of derivatives may still lead to large changes in value and includes the potential for large financial loss. A counterparty to a derivative transaction may fail to meet its obligations which may also lead to a financial loss. Equity investment: The value of equities (e.g. shares) and equity-related investments may vary according to company profits and future prospects as well as more general market factors. In the event of a company default (e.g. insolvency), the owners of their equity rank last in terms of any financial payment from that company.
