Should one considerEuropean stock market investment as timely?
European stock markets have seen a surge in interest from investors seeking value opportunities, with their valuations significantly lower than those in the US. This undervaluation is primarily due to market composition differences, macroeconomic trends favouring traditional sectors, and structural growth catalysts in Europe.
In the first half of 2025, European stocks have outperformed their US counterparts, largely due to lower starting valuations, stronger performance in sectors like European banks, and positive economic catalysts such as increased government spending on defense and infrastructure. Notably, Germany, Spain, and Poland have seen significant investments in these areas, which has supported sectors that tend to be undervalued in Europe compared to the US.
One such company benefiting from this infrastructure spending is Norma Group, a German company manufacturing machine joining components, which is the top holding of Mirabaud's Discovery Europe Ex-UK fund. Mirabaud's fund focuses on identifying undervalued small caps across Europe with a bottom-up approach.
The US market, while still attractive, may narrow the valuation gap if U.S. earnings exceed expectations in the second half of 2025. However, recent US market concerns include a narrow market concentration, high valuations, policy uncertainty, and a mounting debt load that temper enthusiasm.
Currency effects also play a role in relative returns. A weakening dollar and modest euro strength have helped improve euro-area equity returns versus the US for investors dealing with currency exposure.
Despite the relative undervaluation of Europe, the top stocks among investors have had a distinctly American flavor. However, European small caps are especially undervalued at present, according to Hywel Franklin, head of European equities at Mirabaud Asset Management. Technology, particularly artificial intelligence (AI), could be a surprising area of growth for European small companies.
Investors are considering selling US assets due to the weakening of the concept of American exceptionalism, and European defense stocks, such as Rheinmetall (DE:RHM) and Leonardo (MI:LDO), have seen significant gains this year due to increased defense spending.
The European Council has approved a proposal to exempt defense spending from the EU's fiscal rules and to establish a €150 billion EU loan facility to fund military spending. This move is expected to further boost the European defense sector.
Europe could be on the up, driven primarily by a drive to increase defense spend. Trump's tepid stance towards NATO during his second term has prompted increased spending on European defense. Germany's new parliament has approved plans to reform the country's constitutional debt brake, thus removing constraints on defense spending.
Spain's economy grew at 3.2% in 2024, making it the fourth-fastest growing economy in the Eurozone. This growth is attributed to its investment in energy and broadband infrastructure.
In conclusion, the combination of attractive valuations and improving fundamentals creates favorable risk-adjusted return potential for quality-focused investors. Stoetzel recommends focusing on quality companies with specific characteristics when picking individual European stocks. Europe, with its undervalued small caps and promising growth sectors, presents an exciting opportunity for investors seeking value and growth.
References:
- Investopedia
- Bloomberg
- CNBC
- The Wall Street Journal
- Reuters
- Investors are increasingly considering investment trusts that focus on European small caps, as the undervaluation of these companies, particularly in technology and AI, presents a promising growth opportunity.
- The European Council's decision to exempt defense spending from fiscal rules and establish a €150 billion loan facility has led to significant gains in defense stocks, such as Rheinmetall (DE:RHM) and Leonardo (MI:LDO), making them attractive investments for those seeking dividends in this sector.
- In the property and finance sectors, the rapid growth of Spain's economy in 2024, due to investments in energy and broadband infrastructure, has made it an appealing market for investors looking to capitalize on the stock-market's upswing.
