Europe and European equities rise to the challenge

Global equity markets began 2025 expecting a continuation of US exceptionalism and sluggish European growth. But the Trump administration’s tariffs have upended the US exceptionalism story and Germany’s removal of its debt brake is set to unleash a level of spending that could boost future growth projections for Europe.

The shift in investor sentiment is evident in the stock markets, where the MSCI Europe outperformed the S&P 500 in the first quarter of 2025. The portfolio managers of JPMorgan European Growth & Income plc (JEGI) believe the optimism on Europe is indeed justified; the European consumer is healthy and benefiting from positive real wage while the European Central Bank (ECB) has been steadily cutting interest rates.

The exciting new development is Germany’s policy change that will allow the government to significantly ramp up spending on infrastructure and defence that could eventually add around two percentage points to GDP growth per year. This huge commitment is comparable to money spent during Germany’s reunification or the Marshall plan after the Second World War.

The investment perspective is also compelling. In addition to economic growth in Europe potentially accelerating while US growth is slowing, the valuation gap between the two equity markets is still near multi-decade lows: even after outperformance in the first quarter, the MSCI Europe ex-UK index is trading at close to a 30% discount to the S&P 500 index based on 12-month forward price-to-earnings ratios, as of 31 March 2025.¹ A small shift in investor sentiment and flows could give a big boost to European markets.

JEGI’s diverse drivers of consistent performance

While European markets have only recently started to outperform the US, JEGI has been consistently generating alpha across the market cycle, in both growth- and value-oriented markets. The trust has notably generated excess returns in the first quarter of 2025, as well as over one, three, five and 10 years annualised.

These consistent results reflect the team’s disciplined approach that uses fundamental and quantitative methods to select high-quality companies with positive momentum, such as earnings upgrades, for a portfolio that is more attractively valued than the benchmark average.

JEGI is also well diversified. The portfolio managers consider both the country in which companies are listed and the regions their revenues come from. Sector and style exposure are relatively balanced and the portfolio tends to own more stocks than peer group. In addition, roughly 10% of the portfolio² is currently invested in stocks not in the benchmark, most of which are small cap companies.

Indeed, last year’s winners were spread across sectors as diverse as banking, telecommunications and software, and returns were driven by several key holdings rather than a single star performer. JEGI’s large position in Unicredit, a global bank based in Italy, was the top contributor to returns for the 12 months ending 31 March 2025. The bank’s earnings have grown fast and have been continually upgraded, meaning the price-to-earnings (P/E) ratio has remained low, even as the stock price has risen. The portfolio has positions in several other banks with similar attributes that also performed well.

Deutsche Telekom, with its 51% stake in T-mobile in the US, is a good example of defensive growth position that performed extremely well over the past 12 months. Strong returns from German software company SAP, which is in the early stages migrating its customer base to new cloud-based product suite, serve as a reminder that world-leading technology companies exist outside of the US.

Navigating uncertainty with a strong investment process

While JEGI was somewhat cyclically positioned earlier this year, the portfolio managers harvested some gains and added to a few defensive positions, such as Heineken, after the company reported strong results, and Roche, following recent positive news about its drug pipeline. In contrast, Novo Nordisk—a strong contributor to JEGI’s performance last year due to its weight loss drugs—reported results from clinical trials that were below expectations and earnings revisions have started to trend down. The portfolio managers have trimmed the position from an overweight to an underweight, but the recent performance detracted from returns.

Another detractor from performance last year was the decision not to own Rheinmetall, the German defence company. The portfolio managers were cautious due to the valuation but the stock doubled in February on the proposed increase in German and European defence spending. JEGI owns other defense names that are also benefiting.

The portfolio remains underweight some highly cyclical industries, such as materials and autos, which the portfolio managers think will remain challenged due to tariffs.

As the enormous uncertainty around the Trump administration’s tariff policies impacts the macroeconomy and financial markets, JEGI’s portfolio managers acknowledge that most companies will be unlikely to report stronger earnings or raise guidance in the near term. Trade deals are complex: Brexit took three years not three months. Still, relative winners and losers will likely emerge and provide the opportunity to generate returns above the benchmark.

¹ FTSE, IBES, LSEG Datastream, MSCI, S&P Global and J.P. Morgan Asset Management as at 31.03.2025.

² J.P. Morgan Asset Management as at 31.03.2025. The portfolio is actively managed. Holdings, sector weights, allocations and leverage, as applicable, are subject to change at the discretion of the investment manager without notice.