Why Europe deserves a spot in your portfolio

Staci West 01/02/2025 in Europe

From attractive valuations to structural growth drivers, European equities offer a number of compelling reasons to consider adding the region to your portfolio. Europe is a fascinating place packed full of remarkable countries and world-class companies operating in a wide variety of sectors. Whether you’re seeking income, value, or long-term expansion, Europe presents an intriguing case for investment. But does it make a good investment?

6 reasons why it could make financial sense to put your money into Europe

1. Structural growth drivers

European equities are exposed to many of the key structural growth drivers in global economies, according to Niall Gallagher, manager of the GAM Star Continental European Equity fund. “The companies we are invested in are, largely, exposed to some of the key structural trends that we see driving global economies and we can access such opportunities at attractive valuations,” he said.

The structural trends creating opportunities include the rise of the Asian middle class, the digital transformation, and decarbonisation. There’s also the added benefit that they’re modestly valued versus history and far cheaper than the US equity market, which is highly concentrated into a small number of technology stocks. We like Niall’s pragmatic approach and vast experience in European equities, with his team looking to buy stocks that are either out-of-favour or with underappreciated growth prospects.

2. Valuations are attractive

Samantha Gleave, co-manager of the Liontrust European Dynamic fund, believes there are three reasons investors seeking cash-generative stocks should consider the region: “Valuations are attractive, European markets are still in a technical uptrend, and we see little sign of poor investment behaviour by corporates,” she said.

As far as valuations are concerned, Samantha sees European equities, on aggregate, as being around fair value: not exceptionally cheap but not at stretched levels either. “However, when we look specifically at those companies with the best cash flow appeal, we find they look particularly cheap,” she added. This fund benefits from having a flexible investment style, with the ability to rotate towards value or growth depending on where the managers see the most opportunity.

3. Lower interest rates

The European Central Bank could bring interest rates down to 1.75% by the middle of this year*. Lower interest rates should create some opportunities in more indebted sectors like telecoms, and in areas that are sensitive to interest rates, like real estate, according to Goldman Sachs*. M&A activity is also expected to pick up, which also tends to help the small and mid-sized companies because they’re more likely targets of acquisitions.

The Janus Henderson European Selected Opportunities fund takes the macroeconomic environment and sector trends into consideration during portfolio construction. This is a well-diversified portfolio that typically consists of 40 to 50 stocks. It also mixes mega and large-cap holdings with mid-cap stocks to provide additional sources of outperformance.

4. Global industry giants

It’s easy to overlook the fact that many of the world’s most impressive companies across a wide variety of sectors call Europe home. Ben Moore, manager of the CT European Select fund, invests predominantly in large-cap European equities and has no shortage of attractive options. Pharmaceutical giant Novo Nordisk, semiconductor equipment supplier ASML, and French advertising company Publicis Groupe are among the holdings**.

Ben has a fantastic understanding of the companies in which he invests and his fund has delivered some of the strongest returns in the sector. Firms that can defend their margins with barriers to entry are preferred and this has helped the portfolio to be less volatile than most of its peers.

5. Broad diversification

Europe isn’t just about the mega-caps. There are plenty of exciting, innovative smaller companies and this is the focus for the IFSL Marlborough European Special Situations fund. Given its holdings only make around 6% of total sales through exports to the US, this could help the fund ahead of any trade policy changes with the US, according to lead manager David Walton. “This reflects the fund’s focus on smaller companies in Europe, which tend to have a greater share of sales in their home countries, compared with large multinational groups,” he said.

The portfolio is also very diversified from a country perspective with exposure to France, Sweden, Denmark, Italy, Netherlands, Spain, Germany, Finland, Greece and Switzerland**. We consider the team behind this fund to be an experts in small-cap investing, while David has also been very successful at mitigating the risks typically associated with this end of the market-cap scale.

6. Dividends set to rise

Dividends in Europe have been forecast to rise 4% in 2025 – and that means additional investment income, according to a study by Allianz Global Investors***. Companies that can sustainably grow their pay-outs to investors are a focus of the Fidelity European fund, which benefits from a disciplined and cautious long-term approach.

Its manager, Sam Morse, believes the qualities of rising dividend-payers can ensure resilience in uncertain markets and deliver outperformance over the medium to long term: “We remain slightly overweight IT, given the number of stocks here which meet our criteria in terms of being sustainable dividend growers with good quality-growth characteristics,” he said.

We see this as a very solid, core fund that concentrates on bottom-up stock picking. Its performance has been consistently good over many years.

*Source: Goldman Sachs, 18 December 2024
**Source: fund factsheet, 31 December 2024
***Source: Allianz Global Investors, 14 January 2025

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