Are Europe’s strong growth prospects set to continue?

Europe has been a decent place to invest this year – and recent economic data indicates the good times could continue into 2026. The STOXX Europe 600 index had risen 23% in sterling terms by the end of October 2025*, driven by improving sentiment and relatively attractive valuations. And observers believe the European Central Bank’s decision to keep interest rates on hold reflects optimism about the region’s ongoing growth prospects.

While political uncertainty in France could weigh on its economy, the outlook elsewhere is improving, according to Irene Lauro, Eurozone Economist at Schroders, who said: “We remain confident that growth will strengthen into next year, supporting the ECB’s decision to keep interest rates on hold into 2026.”

Optimistic outlook

According to Ben Moore, lead manager of the CT European Select fund, stocks in the region are still trading on a discount to US peers. “Europe is not only attractive on valuation grounds; inflation has proved to be less sticky, so interest rates have fallen,” he said.  

Ben also highlighted resilient earnings, which can often lead to share price increases, and pointed out that good businesses are continuing to grow. He added: “We favour companies that have competitive advantages and pricing power generated by brands, patented processes, regulatory barriers to entry and strong market positions.” 

Sector opportunities

There appears to be opportunities in a variety of sectors. Gilles Guibout, head of European equity strategies at AXA Investment Managers, believes areas such as defence, telecommunications and energy stand to benefit. He highlighted the EU’s Readiness 2030 plan, which aims to increase Europe’s defence capabilities to address decades of underinvestment in the sector. 

“The project includes more than €800bn in defence spending, as well as a €150bn loan facility for procurement and plans to mobilise private capital to support defence investment,” he said. Elsewhere, the European Commission has pledged at least €1 trillion in sustainable investments over the next decade. This commitment aims to help achieve the goals of the European Green Deal, which includes reducing emissions by investing in innovation, clean technology, and green infrastructure.

Smaller companies

The macroeconomic backdrop is also supportive to stocks lower down the market capitalisation scale, according to the managers of the Janus Henderson European Smaller Companies fund. They pointed out that concerns around trade tariffs seem to have faded, while improvements in the Chinese economy added another tailwind as that’s a key trading partner for the region.

In their latest update, they also argued that European small-cap stocks remained attractively valued on an absolute basis: “We believe the discount relative to their European large- cap peers makes small-cap stocks an attractive way to gain access to the domestically-driven European growth opportunity ahead.”

3 ways to get European exposure into your overall portfolio

The most obvious is through a portfolio that’s focused on the region. One example is the WS Lightman European fund. This is a genuine value fund that is recognised for its contrarian approach and willingness to go against the crowd. Managers Rob Burnett and George Boyd-Bowman are seeking companies in which bad news is discounted and there’s a chance of upside surprises.

We also like the BlackRock European Dynamic fund. This portfolio, which can invest in companies of all sizes, is relatively concentrated at around 50 stocks. Its manager, Giles Rothbarth, has a flexible approach and favours companies that are either undervalued and/or have good growth potential. Since Giles took over management of the fund in 2019, he’s outperformed the IA Europe Excluding UK sector by over 30%**.

Of course, you can also dilute exposure by opting for a global fund that has a decent percentage of assets under management in the region. A good example is the Lazard Global Equity Franchise fund which has 38.5% in Continental Europe, almost 33% in North America, and 20% in the UK***. Although it can invest in any global business, there’s a natural bias towards larger companies as it favours industry leaders. 

*Source: FE Analytics, total returns in pounds sterling, 31 December 2024 to 31 October 2025

**Source: FE Analytics, total returns in pounds sterling, 1 February 2019 to 31 October 2025

***Source: fund factsheet, September 2025