Why Europe Could Be a Smart Addition to Your Portfolio
Why Europe Could Be a Smart Addition to Your Portfolio
For years, the United States has led global markets, powered by its tech giants, strong consumer demand, and economic scale. In 2024, the “Magnificent 7” stocks alone delivered a remarkable 67.34%1 return, reinforcing the appeal of US equities.
But in today’s more volatile and fragmented world, relying solely on US assets may expose investors to concentration risks and limit diversification. Europe, often underappreciated, is emerging as a compelling alternative. Here’s why:
- The Changing World Order: Why US Exceptionalism is Dimming
Recent global events have reshaped the investment landscape. The pandemic, the Russia-Ukraine war, Middle East tensions, and President Trump’s divisive trade and immigration policies have accelerated a shift toward a more fractured global order.
This fragmentation has real economic consequences:
- Tariffs heighten inflationary pressures in the US.
- US bond yields remain elevated, with 10-year Treasuries expected to stay above 4%.
- Fiscal sustainability concerns are mounting, limiting policy flexibility.
In this environment, relying only on US assets may no longer offer the growth or diversification investors seek. Instead, it makes sense to explore opportunities in other developed markets like Europe.
- Europe’s Economic Momentum is Building
Despite global headwinds, Europe is showing signs of resilience and recovery thanks to a combination of fiscal stimulus and monetary easing.
Fiscal Tailwinds: Governments across the region are significantly increasing defense spending, following NATO’s new target of 3.5% of GDP. Germany, for example, has already expanded its budget deficit to fund this shift. This long-term investment in defense is expected to stimulate industrial activity, create jobs, and support broader economic growth across the continent over the next decade.
Monetary Easing: The European Central Bank has already halved its interest rates from 4.00% to 2.00% since last summer, with a further cut to 1.75% expected by year-end. Similarly, the Bank of England has lowered rates from 5.25% to 4.25% over the past year and may accelerate cuts to 3.75% or below as the UK labour market softens. These measures help to stimulate demand and reduce borrowing costs.
Growth Outlook: Despite global headwinds—including elevated US tariffs—both the Eurozone and the UK are expected to avoid recession in 2025, with GDP growth forecasted at 0.9% and 1.0% respectively. Additionally, any resolution to the Russia-Ukraine conflict could further boost growth by lowering energy prices and improving sentiment.
- Valuation Matters: European Equities Remain Attractive
Beyond macroeconomic considerations, valuations of European remain attractive. The S&P 500 in the US is priced higher than usual, with a forward price-to-earnings (P/E) ratio of 22.5x, which is much above its 10-year average of 18.6x. On the other hand, the MSCI Europe Index has a forward P/E of 14.7x, which is only a little above its 10-year average of 14.3x. This means US stocks are more expensive compared to their usual prices, while European stocks might be a better choice for investors seeking quality companies at reasonable prices.
Recent market trends support this view. Corporate earnings in Europe have remained resilient, even in the face of global uncertainty. Following the initial volatility from tariff announcements, European equities have staged a V-shaped recovery and outperformed other regions. The MSCI Europe Index rose 10.84% year-to-date, with earnings growth forecasted at 6.5%. This outperformance suggests that international diversification is already paying dividends.
Risks to Watch, Opportunities to Capture
As with all investments, risks remain. Geopolitical tensions could push energy prices higher, and trade disputes may weigh on growth. But even with these risks, Europe’s improving outlook, supportive policies, and undemanding valuations make a strong case for diversification.
In summary, the global investment landscape is shifting. While the US faces headwinds, Europe’s macroeconomic and microeconomic foundations are strengthening. In a world that is rapidly evolving, adding European exposure to your portfolio could help balance risk and provide new sources of long-term growth.
Diversifying with European Funds
For investors looking to gain exposure to European markets, here are two professionally managed funds worth exploring:
This actively managed fund invests in a carefully selected portfolio of European companies, using value, quality, and momentum strategies to drive long-term capital growth.
A global fixed income fund which includes UK and European exposure. It offers income payouts and maintains a high-quality portfolio with an average credit rating of A+. This fund is suitable for investors seeking stable income alongside capital growth potential, and has a historical annualised dividend yield of 6.01% p.a.2
1 Source: Bloomberg, Magnificent 7 Total Return Index. Performance reflects total return in local currency terms.
2 Data is from Bloomberg as at end-June 2025. Past performance figures do not reflect future performance.
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