European equities are rarely the focal point of a strategic asset allocation for investors. In a balanced CHF portfolio, for example, their strategic weight is only around 3%. This is no coincidence: From a global perspective, Europe remains smaller, less growth-oriented, and less relevant in key future-oriented sectors than the US—and increasingly Asia as well. Investors building wealth over the long term should therefore not give European equities too much weight. At the same time, however, it would be equally wrong to ignore them. Precisely because the strategic starting point is modest, tactical opportunities in Europe can add meaningful value, provided they are implemented selectively and with discipline.
And at present, we see several reasons to take a closer look at European equities again. First, the economic backdrop has improved. Falling inflation rates, more stable energy prices, and less restrictive monetary policy are creating a more favorable environment for companies and consumers. Even economic data have recently beaten expectations, after previously falling short due to the conflict in the Middle East. Second, earnings momentum is likely to broaden. The recent rally was driven heavily by a small number of stocks and by enthusiasm around artificial intelligence. But the next phase could be more broad-based, especially if leading indicators in industry continue to stabilize and investment picks up again.
European industrial stocks remain particularly interesting. They benefit from several structural trends: the expansion of power grids, electrification, reindustrialization, defense spending, and infrastructure related to data centers. Select consumer stocks also deserve attention. High savings rates, rising real incomes, and a potential recovery in the luxury segment could support demand. In addition, recent developments in Germany are important: After years of weak growth, higher spending on infrastructure and defense, as well as a cyclical recovery in industry, could improve the earnings outlook. For Swiss investors, it is also important that European exposure offers a degree of diversification relative to the domestic market, which is more heavily shaped by defensive quality stocks.
Nevertheless, Europe continues to face strategic challenges. The Eurozone still suffers from structurally low trend growth, unfavorable demographics, fragmented capital markets, considerable need for reform, dense regulation, and weaker innovation momentum. Energy dependence and geopolitical vulnerability are lower than they were a few years ago, but they are far from gone. Fiscal policy can also provide sustainable support only if it is used to promote growth rather than merely increasing existing budget burdens. Defense spending, in particular, is rather problematic in this respect. The corporate landscape remains heterogeneous: Alongside globally leading niche champions, there are many companies with limited pricing power and low productivity.
Our conclusion is that investors should keep European equities on their radar. However, they play a relatively subordinate role in a diversified portfolio. We think a neutral strategic weighting remains appropriate, while those who wish to act tactically can selectively focus on areas where structural demand, political support, and improved earnings expectations come together. Industrial stocks, certain consumer companies, quality stocks in Switzerland and Germany, as well as companies linked to defense, automation, electrification, and artificial intelligence appear particularly interesting. The key is not to buy Europe as a homogeneous bloc, but to identify specifically the beneficiaries of change. In that case, even a small allocation can make a relevant contribution to portfolio returns.
