According to the Investment Association’s (IA) retail sales for December, the IA Europe ex UK sector was the second most popular among investors (behind Volatility Managed) taking in net sales of £252.6m for the month. As investors moved money out of the US in 2025, the stats also revealed that for the entire year, European equity funds enjoyed £761m net new cash. To put this in context, while UK equity funds had their strongest year for flows since 2021, outflows still hit £11.1bn.
Performance wise, 2025 was a good year for Europe. According to data from FE fundinfo, over the calendar year the MSCI Europe Index was up 26.4% in sterling terms, while the average fund in the IA Europe ex UK sector posted a gain of 22.5%. Since the turn of the year, this good performance has continued, with the MSCI Europe index up 6.7% versus a flat return from the S&P 500. So, is now a good time to invest?
In this month’s head-to-head, Tom Kynge, multi-asset manager at Sarasin & Partners, notes that Europe continues to trade at attractive levels, particularly when assessed against its own history, while Hilde Jenssen, co-portfolio manager of the Nordea 1 – Empower Europe fund, looks at the decisive turning point that the region stands at.
Tom Kynge, multi-asset portfolio manager, Sarasin & Partners
One of the most significant drivers of global equity markets in recent times has been the evolving macro backdrop. The current environment is characterised by a ‘run it hot’ economy, driven by stronger nominal growth and more persistent inflation. In this context, the European equity market offers exposure to areas that benefit directly from these conditions – particularly financials, industrials and defence-related names.
European banks, in particular, stand out after a prolonged period of underperformance over the better part of a decade, prior to the pandemic. Persistent inflation, steeper yield curves and improved balance sheets have created a more supportive earnings environment and materially improved the investment case for banking institutions. The changing dynamics have made banks an attractive source of equity exposure within a diversified portfolio.
As for defence, the security theme has played an important role in shaping our European equity allocations. Rising geopolitical tensions, Russia’s war in Ukraine, threats of additional conflict and a change in stance by the current US administration have increased pressure on European nations to re-examine their defence strategies.
These factors have led to a reappraisal of government spending programmes and increased fiscal spending across the region, especially in defence and infrastructure.
Exposure to European defence companies and industrial names reflects both near-term spending commitments and longer-term shifts in government priorities. Germany is a notable example, where expectations of increased fiscal expenditure are being expressed through selective equity exposure, including industrial companies positioned to benefit from public investment and reindustrialisation efforts.
Valuations also remain a key part of the European equity story. Relative to other major regions, Europe continues to trade at more attractive levels, particularly when assessed against its own history. This valuation support has helped to mitigate downside risk and provided a favourable entry point into a number of cyclical areas aligned with growth and inflation themes.
Importantly, this does not require a compromise on quality, as many European companies continue to display strong balance sheets, global revenue streams and improving return profiles.
As always, given the variety of economies and government policies across Europe, investing requires a thoughtful and selective approach – as the macro factors described above are not uniformly distributed. For example, fiscal spending in Germany is more supportive than elsewhere, making German defence companies relatively more attractive.
In a similar fashion, the peripheral European economies often referred to as the PIIGS – Portugal, Italy, Ireland, Greece and Spain – were among the nations that faced the most acute pain during the European sovereign debt crisis. However, these economies are now generally less indebted and are enjoying a period of robust economic growth. This makes these markets relatively more attractive than they have been for several years.
From a portfolio construction perspective, European equity markets also play an important role in diversification. Our strategy is currently running a modest underweight position in the previously dominant US market, reflecting the relative attractiveness of opportunities elsewhere, as well as the significant concentration of global indices.
Europe, alongside emerging markets, has absorbed some of this reallocation, helping to broaden sources of return and to reduce reliance on a narrow set of US-led market drivers. Of course, this has been done selectively, focusing on areas where the fundamental outlook is improving rather than through indiscriminate regional exposure.
Hilde Jenssen, co-portfolio manager, Nordea 1 – Empower Europe fund
The European vision has historically emphasised economic unity, free trade and international collaboration. However, Europe now stands at a decisive turning point, with the current geopolitical landscape necessitating a complete rethink of its strategic approach.
The recent fracturing of the longstanding global order exposed Europe’s external dependencies – such as military support from the US, manufacturing from Asia and energy from Russia. But Europe remains strong enough to stand on its own and compete with the other global powers.
While the transition to greater self-reliance will take most of a generation, Europe’s bold €1.1trn investment programmes – which include the REPowerEU Plan, the European Chips Act, and the ReArm/Readiness 2030 initiative – are laying the foundations for a more competitive Europe.
This transformation has created a unique window of opportunity for investors to share in the multi-year growth of companies at the forefront of Europe’s efforts to secure energy resources, achieve industrial independence and strengthen defence capacities.
Within energy resilience, Europe is accelerating investment in critical infrastructure and systems to reduce external dependencies and strengthen long-term supply stability. Supported by the €300bn REPowerEU plan, efforts include modernising power grids, increasing domestic resource recovery, upgrading inefficient building stock and securing access to essential raw materials – all key components of a more self-sufficient and resilient energy landscape.
Building a robust, interconnected energy grid is crucial for Europe to achieve energy security and maintain economic competitiveness. This is intensifying investor interest in companies such as Italian cables and telecommunications manufacturer Prysmian, which plays a pivotal role in modernising the infrastructure underpinning Europe’s energy security.
In addition, Europe is rebuilding its industrial base with a renewed focus on automation, robotics and operational control. Significant investment in machinery, R&D and intellectual property will be vital to restoring competitiveness, and the EU has earmarked about €100bn in reshoring incentives through 2030.
Here, mid-cap Dutch company CPT is a direct play on Europe’s industrial reshoring wave. A leading commercial real estate developer and manager, specialising in the development of high-tech business parks and industrial properties, the company is positioned as a key enabler of supply chain and logistics reconfiguration. CPT’s extensive landbank provides capacity for companies relocating production from Asia to Europe.
Finally, as evidenced by the ongoing war in Ukraine and the recent turbulence surrounding Greenland, Europe is facing constant and evolving pressures on its physical borders and digital networks. As such, governments and authorities are responding with urgently needed defence and cybersecurity investment.
Encouragingly, we are seeing greater cooperation among EU member states, along with long-term strategies to develop European suppliers, scale critical technologies and build stronger local ecosystems. This is about anchoring defence and cybersecurity capabilities within Europe and reducing dependence on external partners. This kind of structural shift creates a stable, recurring demand for firms operating in the space, as the transition is underway and moving fast.
We view defence and cybersecurity as a long-cycle opportunity, a chance for investors to align with a strategic theme that offers resilience and growth potential. We have identified numerous companies essential to building, securing and maintaining Europe’s strategic autonomy across both physical and digital domains.
A great example is Theon, a mid-cap Greek company that develops night-vision and thermal-imaging systems used by military and law enforcement agencies. Founded in 1997, Theon’s technologies enhance operational capabilities in low-visibility environments, supporting defence missions, border control and surveillance. What sets Theon apart is that it designs, develops and manufactures entirely within Europe, with strong participation in European Defence programmes, such as Germany’s Future Soldier initiative.
As Europe mobilises to secure a successful future, public and private capital will play a key role in building a safer, more resilient continent.
This article originally appeared in the March issue of Portfolio Adviser magazine
