Europe's moment

For years, global investor portfolios have been skewed toward the US. But this concentration – particularly in a narrow band of mega-cap tech stocks – is starting to show cracks. As trade tensions resurface and valuations in the US test historical extremes, European equities are beginning to attract fresh attention.

This shift isn’t just about relative value. It’s being driven by signs of real change in Europe’s economic outlook, policy direction, and structural reform agenda. For the first time in several years, Europe’s equity markets offer not just lower prices, but also a credible growth story.

Capital rotation into Europe

The valuation gap between the US and Europe has widened over time – and is now at quite extreme levels. US equities continue to command premiums despite a narrow leadership profile and rising geopolitical uncertainty. In contrast, Europe offers broad-based exposure to high-quality companies trading at historically attractive levels.

Smaller European companies, in particular, stand out as overlooked and undervalued. While US small-caps face a higher cost of capital and a crowded investment landscape, many European peers are priced at levels not seen since the global financial crisis.

As relative performance improves, some investors are already using the recent market bounce to shift allocations away from the US and into European equities. M&A activity is also expected to rise, given the valuation support.

Closing the growth gap

One of the key arguments for US equity dominance has been its stronger growth profile. But that may be changing. European growth forecasts have been steadily revised upward, and some analysts expect to see similar growth rates for Europe and the US over the next couple of years. If this convergence materialises, the case for maintaining a heavy US overweight becomes less compelling. Why pay a premium for "US exceptionalism" when similar growth is available at a discount?

Europe’s structural flaws – labour market rigidity, uneven fiscal policy, regulatory complexity – are well known. But there is growing recognition that reform is no longer optional. Policy efforts are increasingly geared toward unlocking productivity and competitiveness, and markets have yet to fully price in the upside from these shifts.

Reform momentum: Germany leads the way

Germany, the region’s economic engine, is showing signs of a meaningful policy pivot. Despite a turbulent start to the year for Chancellor Friedrich Merz, the coalition government has laid out a bold pro-growth agenda. Measures include lower corporate taxes, energy price reductions, and deregulation aimed at spurring private-sector investment.

Germany is also rethinking its strategic relationships, particularly with China. Echoing past missteps with Russia, leaders are urging more independence and resilience in European supply chains and markets. As these priorities translate into concrete action, sentiment towards Germany – and Europe more broadly – could improve significantly.

Where are the opportunities? Small-caps, multi-sector

From a bottom-up perspective, the opportunity set in Europe is compelling. In defensive sectors, many companies are generating healthy cash flows and trading at multi-year valuation lows. In growth sectors, world-class businesses are available at discounts to global peers. Distressed areas of the market, meanwhile, often reflect scenarios more pessimistic than fundamentals justify.

Perhaps most overlooked is the small-cap segment, which remains heavily underowned and deeply discounted. For investors willing to take a long-term view, the risk-reward profile is unusually attractive.

Conclusion

Europe may not have the same tech-fuelled excitement as the US, but its combination of improving fundamentals, attractive valuations, and credible policy reform makes it increasingly hard to ignore. For investors reassessing global equity exposure, underweighting Europe could mean missing a major inflection point.

Click here to read more on the investment case for European small-caps.