European equities had a good start to 2025. Actually, the best relative start to a year versus the US for 20 years. So, the question is, is this sustainable?

Well, the starting point has been one of extremes. We went into 2025 with European equities trading at record discounts to the US. Then in the first two months of the year, a lot of focus was on a potential forthcoming ceasefire in Ukraine. Obviously, this would have various positive impacts on the European economy, like a boost to Eastern Europe, a boost to consumer sentiment. And we think this is now pretty well understood. And obviously we don’t have a crystal ball to how and when such a deal will actually transpire, but it provides positive optionality.

Now, beyond this particular Ukraine catalyst, there have been several developments that could have an even more durable impact on the European economy. Now, if we stand back for a second, it’s clear that Europe has been under enormous pressure. The economy has been stagnant for several years and the external pressures have only been mounting and from all sides. So, Russia is clearly undermining European security, China is adopting aggressive trade policies, the US is unhappy about the trade deficit, [and] talks about tariffs are softening the NATO security umbrella.

So, Europe has been in a kind of pressure cooker. But now we think we have reached a kind of boiling point. And why do I say that? For we have recently seen various initiatives that suggest that there is some kind of political reason ongoing, some kind of structural reform on the way, but let’s look at some of these topics.

Let’s start with Germany, which is very topical. The new government is not yet in place, but it has already announced their intention to launch an ambitious infrastructure package (€500 billion) and a similar amount into defence. Now these are very big numbers, and they could leave German GDP [lower] by a percent per annum. The good news is that Germany can actually afford this. It will take their debt to GDP to 80%, which is still one of the best scores in Western Europe. So, we could have here a real landmark moment where Germany is finally using its financial muscles to stimulate the economy, something investors have been waiting for a long, long time.

I mentioned defence in Germany, but it also has a wider European dimension. The European Union is talking about exempting defence from fiscal rules. Is talking about using joint borrowing for defence purposes. These are all developments which would have looked very implausible only a short time ago. We can also look at financial regulation. For years, it was very fashionable to bash the banks, to ever increase the capital requirements, to increase regulation. Now this has stabilised, and now we talk about holding back some of this regulation, and we even talk again about Capital Markets Union.

Another topic is, for example, the European Union announced 10 days ago to roll back some of the sustainability disclosure requirements. Put that in a different language. It means cutting back red tape, and so we choose to support private enterprise. A last example relates to the automotive industry, where policies looking at the transition to electric vehicles change a bit from less stick more carrot. So not just finding European manufacturers but supporting them in the transition.

Now, do we know where all these initiatives will lead to? The answer is no, and there are plenty of risks attached to them. For example, the German package still needs to pass Parliament, and this is by no way certain, so the road ahead will clearly be rocky. And look, I have been in European equities for 20 years, and it would not be the first time that we have seen a false start. Having said that, it is still extremely encouraging to see all these signs all pointing towards the willingness to get economic momentum going in Europe.

And let’s go back to where we started. The valuation levels of European equities are not very demanding. And hence investors don’t pay for all this optionality. Don’t pay for this positive change which could come. And hence, the rewards are attractive. And since 2005 we have actually seen €550 billion of assets leaving European focused equity funds or portfolios. Now this year we have seen €4 billion returning. But this is obviously only a kind of drop in the ocean, and so if this fundamental momentum keeps going – there’s a long way to go here.