SUMMARY
Policy is boosting Europe’s economic outlook, while global investors’ perceptions are improving. We thus recently added to our tactical exposure to European equities.
The larger or faster an object, the more detectable it may be to certain radar.
No wonder, then, that in recent years, the US equity market has been the main feature on global investors’ radar displays.
The world’s biggest stock market has also moved rapidly, registering higher returns than many of its international peers.
In 2025, however, other equity markets are also figuring more prominently on the monitor again, among them Europe.
The Euro Stoxx 50 Index had returned 22.1% year-to-date as of 16 June when measured in US dollars, compared to just 2.8% for the S&P 500 Index.
So, what’s going on and – perhaps more importantly – can Europe remain on investors’ radar?
Positive fundamentals and flows
We see a compelling case for Europe for global investors to mull.
For starters, the regional economy could get a boost in 2026 from easier fiscal policy. Germany’s plans to borrow and spend heavily on defense and infrastructure is a key factor.
Monetary policy is also playing a part. The European Central Bank has already halved its main interest rate over the last two years. Further cuts toward 1.5% by the end of this year could follow if the European Union’s trade standoff with the US escalates.
If US growth slows further – and European equity outperformance continues – we may see more capital flow into European assets.
The US could intensify this flow if it goes through with its proposal to raise taxes on foreign entities operating in the US if their home country is deemed to have an “unfair” tax system. However, it remains to be seen whether it will do so.
Growth risks ahead
Despite our constructive view on Europe, we do not deny the pitfalls that may lie ahead.
Sentiment surveys continue to suggest a high level of uncertainty about the direction of economic activity.
May’s PMI composite output index reading – a crucial measure of private sector activity – suggested that Euro area growth might have slowed almost to a halt in the current quarter.
The early strength in 2025 was partly thanks to businesses boosting their inventories ahead of the US tariff announcements. The payback for this may be less activity in the period ahead.
Many exporting businesses are expressing fears about potential tariff damage.
Our tactical positioning
On balance, we expect European equities to remain on global investors’ radar for now.
Our Global Investment Committee therefore went overweight European excluding the UK and Switzerland at our June meeting.
We also upped our exposure to US large-cap equities while also going overweight China.
At the same time, we also removed our entire allocation to global small- and mid-cap equities, an area that we see as more vulnerable if growth disappoints.
We believe these moves may raise overall portfolio quality amid continued investor uncertainty.
