European equities remain attractive compared to US counterparts
19 AUG, 2025
By Tom O’Hara, Investment Director, European Equities, GAM
In June, European equity markets recorded a slight decline, underperforming their US and global peers, despite having outperformed significantly in the first half of the year. The MSCI Europe Index fell 1.30% (EUR) in June, as investors grew cautious amid rising geopolitical tensions and uncertainty over global trade policy, particularly in relation to the Middle East and temporary adjustments to US tariffs, with the three-month moratorium set to expire after Liberation Day.
Meanwhile, with the UK economy facing headwinds, the Bank of England is widely expected to cut UK interest ratesby around 50 basis points by the end of 2025, despite inflation remaining well above the official 2.0% target.
Despite short-term challenges across Europe, corporate fundamentals have remained stable, with steady earnings forecasts and some revival in capital markets activity. Rosebank Industries PLC’s £1.14 billion acquisition of Electrical Components International (ECI) — one of the UK’s largest M&A deals in the past decade — highlights strong investor confidence and marks the biggest primary capital raising in the UK since 2021.
Nevertheless, investors remain alert to ongoing trade discussions and the short-term effects of tariffs, while also keeping an eye on broader global disinflationary trends emerging towards year-end.
At the national level, Portugal, Norway, and the Netherlands outperformed the benchmark, while Switzerland, the UK, and Belgium lagged behind. By sector, energy, utilities, and IT led performance, whereas consumer staples, consumer discretionary, and healthcare underperformed.
Outlook
The European investment landscape is undergoing a structural transformation, shaped by shifts in global dynamics and a renewed emphasis on self-sufficiency. Despite long-standing scepticism about Europe’s ability to reform, we believe rising geopolitical uncertainty — stemming from the Russia-Ukraine conflict, US trade assertiveness, and weak economic growth — is forcing change.
Germany remains at the forefront of this shift, moving away from strict fiscal conservatism. Recently announced infrastructure and defence stimulus measures should have positive spill-over effects on the economy, while also attracting foreign private capital.
We expect German fiscal stimulus to benefit listed companies in other countries with exposure to the German market. At the EU level, there are tentative signs of investor-friendly reforms, including support for cross-border banking consolidation, discussions on a Capital Markets Union, sector consolidation in space and defence procurement, relaxation of certain environmental policies, and a sharper focus on competitiveness.
European equities continue to trade at attractive valuations compared to their US counterparts, with a valuation gap exceeding 30%. We believe this discount could narrow as confidence strengthens. In this environment, we remain committed to navigating the evolving macroeconomic and regulatory backdrop with a disciplined, fundamentals-driven investment approach.
