With European markets entering 2025 on firmer footing, Nick Davis, Fund Manager at Polar Capital, outlines why the European ex-UK market offers an especially compelling investment case.
As we progress further into 2025, the European ex-UK market presents a compelling investment landscape, characterised by resilience, strategic shifts, and undervaluation relative to its global peers. In terms of the market dynamics and strategic shifts, Europe has delivered a solid 2024 annual earnings season. This marks a significant shift from the post-Eurozone crisis era, where earnings growth was minimal and index movements were driven by valuation fluctuations. The European Central Bank’s cut interest rate cut to 2.5% in March and we see scope for further cuts to help the economy navigate short term uncertainty.
The last few weeks have been dominated by tariffs but we have intentionally avoided sectors which are most vulnerable such as Eurozone cyclicals (banks), autos and consumer discretionary. On a more positive side, the recent developments in AI, particularly the launch of DeepSeek’s model, should help the benefits be shared more evenly between the European companies adopting AI and the large US technology companies. We see potential productivity gains for AI adopters in Europe and are focused on choosing the companies that are best able to retain these gains.
Europe’s resilience and undervaluation compared to the US creates a fertile ground for selective quality stocks and dividend strategies. This is a turning point for Europe, emphasising the region’s compelling opportunities despite prevailing narratives. We see sentiment and asset allocation to Europe ex UK as simply too low in this context.
Looking ahead, investors should consider increasing their allocations to Europe. The region’s pivot to more pragmatic fiscal, competition and green policies is genuinely compelling. These policy changes coupled with attractive starting valuations and improved earnings outlook over the medium term, support a constructive view.
As Europe continues to strengthen its resilience and navigate geopolitical shifts there is a promising outlook for investors seeking to capitalise on the region’s undervaluation and growth prospects
