Equities
Making Europe great again: A new era for value investing?
5 min read 19 Jun 25
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European equities are experiencing a renaissance so far in 2025 and are ahead of US stocks by a wide margin. Richard Halle, manager of the M&G European ex UK Strategy, which takes a value approach to investing, explores what’s making European markets great again, in his view, and asks: could this be the start of an exciting new era for value investing in Europe?
After years of underperformance, European equities are currently ahead of their US counterparts in 2025 at the time of writing. The market has even been resilient in the face of President Trump’s sweeping tariffs; share prices have bounced back strongly from April’s steep declines.
Investors’ new-found enthusiasm for the region is a seismic shift, particularly given the extreme amount of pessimism towards Europe at the start of the year.
Concerns about fiscal problems in France and Italy, the ongoing war in Ukraine and the region’s lacklustre economic growth all contributed to the initial negative sentiment.
“The valuation gap between the European and US markets reached an extreme level, driven largely by widespread acceptance of the narrative of US exceptionalism and the corresponding notion of European decline.”
The pessimism was evident in the money flowing out of European equities – notably into US stocks – and also in valuations. The valuation gap between the European and US markets reached an extreme level, driven largely by widespread acceptance of the narrative of US exceptionalism and the corresponding notion of European decline.
Regime change
It could be argued that investors’ belief in US exceptionalism may have been misplaced. The huge amount of fiscal stimulus in the US – the federal budget deficit is running above 6% of GDP1 – arguably boosted an already strong economy and supported consumer spending. In our view, it also fuelled bubble-like behaviour in some parts of the stock market.
However, as this year has progressed, certain factors supporting US exceptionalism have gone into reverse, while developments in Europe have fostered a more optimistic view on the continent.
A significant challenge to investors’ view on the US was President Trump’s wide-ranging import taxes on US trading partners. Although the most severe tariffs have been put on hold or reversed while trade negotiations take place, the policy has sparked considerable uncertainty about the outlook for the US economy.
In addition, there appears to be a realisation that US government spending is on an unsustainable path – hence the Department of Government Efficiency (DOGE). These concerns have been amplified by the tax cuts in Trump’s “big, beautiful bill”, which could cause the US federal deficit to rocket.
“Trump’s efforts to Make America Great Again appear to be having a galvanising effect on Europe”
Conversely, Trump’s efforts to Make America Great Again appear to be having a galvanising effect on Europe. In particular, the continent’s policymakers have responded decisively to the US’s planned reduction in military support for Europe and introduced measures to provide for their own security and defence.
Most notably, newly installed German Chancellor Friedrich Merz has announced a huge stimulus package to invest in infrastructure and defence. The easing of the so-called “debt brake” to increase borrowing for defence spending shows emphatically that Germany is embarking on a new path2.
Combined with the European Union’s proposed €800 billion increase in defence spending, Germany’s stimulus potentially represents a game-changing development for the continent’s prospects3.
Although Trump’s trade policies represent a potential headwind for the region, it is likely that a favourable outcome can be achieved. The US will want to maintain its trading connections. The recently announced US-UK trade deal and signs of progress in US-China negotiations suggest that further agreements will be reached, mitigating the trade tensions.
Of course, one potential challenge for the region is where Chinese goods previously destined for the US might end up; Europe needs to have firm rules in place to protect itself from China’s excess capacity.
Despite the uncertain macroeconomic backdrop, from an investment perspective, this new environment could lead to a new narrative around Europe. The robust performance of European equities this year suggests that investor sentiment has changed; it is plausible that this could be the start of a new investment regime.
New regime, new winners
Just as investors have favoured the US over Europe in recent years, within the European market there has been a clear preference for growth over value. Any money that has come into the market has typically been directed towards growth stocks while the cheaper, out-of-favour parts of the market have been overlooked.
An extremely wide valuation gap between value and growth stocks has opened up, which we believe represents a compelling investment opportunity for investors who focus on mispriced opportunities among lowly valued stocks.
Favourable environment for value
The prospect of increased defence spending in Europe could provide a major boost to the continent’s economy in the coming years. Importantly, the effects of rearmament are likely to be felt beyond the defence industry. The European economy is relatively interconnected and the spending could have a multiplier effect, permeating into other sectors.
Encouragingly for European value investors, many of the companies and areas that are likely to do well out of the investment and potential rejuvenation of Europe can be found in the value space.
Defence stocks are the most prominent example. Having been out of favour for years, they have rallied as investors expect them to benefit from Europe’s rearmament. Other potential beneficiaries include banks, a classic ‘value’ category, which could profit from a broad economic recovery and uptick in lending. Additionally, industrial and materials business could stand to gain from both defence and infrastructure spending.
“Many of the companies that are likely to do well in an environment of increased investment and improving economic activity can be found in the value space.”
Towards the end of last year, worries about the economic outlook began to weigh heavily on some of Europe’s more economically sensitive stocks. Cement, building, chemicals and materials businesses appeared to be trading at exceptional valuations. However, illustrating how quickly market perceptions can change, these are precisely the sort of companies that could play a pivotal role in the anticipated reindustrialisation of the European economy.
Positive outlook
European markets have made a strong start to the year but given the continued wide valuation discount to the US and the potential for fundamental drivers, we believe the outlook for European stocks remains positive.
There is still a lot of uncertainty at the moment around issues such as tariffs and the Ukraine war. However, notwithstanding the potential risks, we believe it’s possible to construct a positive story on Europe today – and we’re particularly optimistic that the next chapter for Europe could offer plenty of opportunities for value investors.
1Source: Congressional Budget Office, ‘The Long-Term Budget Outlook: 2025 to 2055’ , (cbo.gov), March 2025.
2Euronews, ‘Germany’s upper house clears historic defence spending bill’, (euronews.com), March 2025.
3European Commission, ‘Commission unveils the White Paper for European Defence and the ReArm Europe Plan/Readiness 2030’, March 2025.
The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast, nor a recommendation to purchase or sell any particular security.
