As investors return to European equities, we believe Europe Dynamic’s unconstrained approach, based on bottom-up stock selection, is well positioned to benefit.
Investors are returning to European equities
Europe is coming back into focus, as a combination of fiscal stimulus, lower interest rates and attractive valuations renew investors’ attention. Flows into European equities turned positive early in 2025 and accelerated through the year, with further strong demand seen in the opening months of 2026. While the conflict in the Middle East, and other geopolitical concerns, continue to cause volatility, the broad outlook for European equities remains broadly positive, in our view.
As investors return to European equities, we believe Europe Dynamic’s unconstrained approach, based on bottom-up stock selection, is well positioned to benefit. In the fund, we only invest in our best European stock ideas, providing exposure to some of the region’s most compelling investment opportunities. Importantly, because the fund is dynamically managed, the portfolio can adapt quickly as the opportunity set moves, without letting short‑term noise dictate decisions. When the market backdrop changes, as it has done over the last year, the fund will react. And whenever we identify a great stock idea, you can be sure that it will be in Europe Dynamic.
Positioning is driven by our stock-level research. We look at our fundamental analysis, as well as our quantitative insights, and ask three questions: is it a good company? Is it attractively valued? And does the stock have an improving outlook (and, just as importantly, is that improvement under‑appreciated)? We want to buy great businesses, at the right price, and at the right time.
Positioning reflects the changing market backdrop
While we’re positive on Europe’s markets, the conflict in the Middle East is causing uncertainty over the immediate outlook. In terms of direct impact, while some European companies would be most obviously affected should oil prices remain high for a long period of time (airlines for example), we would expect to see winners, as well as losers, emerge across sectors.
More broadly, European markets continue to benefit from the move by investors to diversify their portfolios away from the technology and artificial intelligence stocks that have dominated US and Asian markets over the last few years. A lot of the US and Asian markets is now dependent on tech spending and earnings, but Europe has far less tech exposure. As flows return to Europe in search of diversification, the stocks that we think have the best potential to translate this renewed investor interest into durable returns can be found across a broad range of sectors.
Take the banking sector, which is a material part of the European index. Europe’s banks were hit badly by the zero interest rate environment of the 2010s, but cost cutting and digitalisation means the sector was able to regain its former profitability when rates turned positive, even though rates are structurally lower now than they were before the financial crisis. Over the last five years, Europe’s banks have outperformed the Magnificent Seven stocks. We have holdings in several attractively valued European lenders, including UniCredit in Italy and AIB in Ireland.
Another example of the kind of stock we like is Engie, a well-managed French energy provider. The stock pays a 7.5% dividend yield, reflecting its focus on shareholder value, and the valuation is also attractive compared to an energy sector that is seeing some of the strongest growth forecasts in years due to expectations for growing data centre demand. However, it’s Engie’s earnings growth forecasts that stand out, thanks to its flexible generation capacity, which is hugely beneficial in a market that’s increasingly reliant on unpredictable renewable generation.
Beyond these examples, many of Europe’s most interesting stocks at the moment can be grouped together into three main buckets: Europe’s consumer winners, the hidden gems, and the fiscal stimulus beneficiaries.
Consumer winners
Europe’s consumer sectors don’t, on the face of it, look like providing rich pickings for investors given consumer spending has been in the doldrums for some time right across the region. But looking beneath the headlines reveals a European consumer that is showing signs of regaining confidence, supported by falling interest rates and a post-pandemic build-up of excess savings. Stocks that we hold that stand to benefit from any pickup in consumer demand include Carlsberg, the brewer. Falling alcohol consumption headlines have hit the sector, but our analyst research shows that all of this fall, and more, is accounted for by wine. Demand for spirits and beer is not falling, helping to support Carlsberg’s beer sales, while the company is also doing a good job integrating its recent acquisitions, most notably Britvic, so that they can contribute to earnings.
Hidden gems
Europe’s hidden gems can be found widely across sectors, particularly in the small and mid cap space. Asmodee Group, for example, is a boardgame maker that is benefiting from growing worries over children and screentime. Asmodee’s games, such as Ticket to Ride, are proving a popular way for parents to get their kids away from their phones.
Fiscal stimulus beneficiaries
When it comes to stock selection at the moment, policy really matters. So far, the fiscal theme has very much been a German story, which is why we like stocks such as Bilfinger, a well-managed mid-cap German industrial stock that does most of its business in Germany and is well set to benefit from German infrastructure spending.
Other European governments are now also starting to step up investment in defence, digitalisation, infrastructure and the energy transition. That spending is uneven, but it is real, multi‑year and is expanding addressable markets for many European corporates. In terms of defence spending, for example, government money is increasing earnings growth expectations, but some markets will benefit more than others. And when it comes to defence, governments tend to support domestic companies. Among our preferred stocks is Spanish defence contractor Indra Sistemas, which looks attractive given Spain lags far behind its Nato spending commitment.
The same is true for infrastructure spending, where spending has so far been slower to materialise as governments think how they can allocate spending most effectively. Planning and building large infrastructure projects is complex, after all. But government spending commitments are starting to be seen in earnings forecasts. Among the expected beneficiaries, we like French industrial SPIE, which stands to benefit from the European electrification theme as governments transition to cleaner energy supplies*.