Reassessing Europe: The case for a multi-asset total return approach
KEY POINTS
Following a prolonged period of being under the radar, Europe is increasingly coming back into global investors’ focus.
The pick‑up in investment inflows observed in 2025 has carried into 2026, supported by more attractive valuations, a more accommodative monetary policy mix, and a rebalancing of global growth dynamics.
This renewed interest also coincides with growing concerns around the concentration of global portfolios that are heavily skewed toward a narrow set of regions, sectors, and styles. This can be challenging for portfolio resilience in a more fragmented, uncertain environment.
The Middle East conflict has caused significant market volatility, but at the same time, depending on the war’s duration and whether it escalates, market opportunities remain. And certainly, the impact on oil and gas prices will influence Europe’s future growth prospects and monetary policy.
In such an environment, we believe a multi‑asset total return approach offers a potentially attractive way to re‑engage with Europe. By combining equities and fixed income with other diversified sources of return, across a flexible framework, we believe such a strategy could be well positioned to capture the region’s opportunities while actively managing risk.
Below we highlight four reasons why we believe Europe presents plenty of multi-asset investment potential.
1. Economic backdrop
Europe’s macroeconomic backdrop has strengthened meaningfully over recent years. Core economies such as Germany and France have shown resilience despite global uncertainty, supported by robust labour markets and stabilising domestic demand.
However, Europe is not immune to the current global geopolitical tensions. European Central Bank forecasts put annual real GDP growth at 0.9% in 2026, although rising to 1.3% in 2027. Compared with December 2025 projections, economic growth has been revised down by 0.3 percentage points for 2026 and by 0.1 percentage points for 2027, on account of the Middle East war1.
Monetary policy is also increasingly supportive. After an aggressive tightening cycle, the ECB has eased policy with the deposit facility rate now at 2%. While inflation is expected to average 2.6% through 2026, according to the ECB’s latest forecast, it expects it to ease to its 2% target in 2027.
2. Attractive valuations
Despite the improvement in fundamentals, European assets continue to trade at attractive valuation levels. European equities remain priced at a significant discount to their US counterparts. As of March 2026, the MSCI Europe index trades around 14 times forward earnings, compared to 20 times for US equities, representing a wide valuation gap2.This has been the case since the global financial crisis, even if in 2025 much of the rest of the world outperforms the US index.
- ECB staff macroeconomic projections for the euro area, March 2026
- BNP Paribas/Factset/MSCI March 2026
This discount persists even as performance has begun to improve. In 2025, the MSCI Europe Index delivered a 19.4% return in euro terms, materially outperforming the MSCI USA Index over the same period, driven by a broad‑based recovery across sectors rather than a narrow group of mega‑caps.3
The more normal inflationary backdrop we witnessed prior to the Middle East conflict, alongside improving earnings visibility, further strengthen the investment case in our view. Stabilising prices and lower rate volatility have helped compress credit spreads and improved the risk‑reward profile of European corporate bonds.
A total return approach allows investors to combine these valuation advantages with active risk management, potentially capturing upside while maintaining flexibility as markets evolve.
3. Structural growth themes gain momentum
Beyond a cyclical recovery, Europe is benefiting from powerful structural investment trends. One of the most visible is the sharp acceleration in infrastructure and defence spending. EU defence was projected to reach a record €380 billion to €390 billion in 2025 - an 11% rise over 2024 and almost double 2020 levels and exceeding 2% of GDP for the first time.4
Under NATO commitments, European defence spending could approach €800 billion by the end of the decade, supporting sustained investment across industrials, technology, and advanced manufacturing, according to consultancy McKinsey.5
At the same time, Europe is accelerating its investment in the energy transition, as well as in automation and strategic autonomy. Reshoring initiatives, clean energy deployment, and healthcare innovation are driving long‑term capital expenditure across both public and private sectors. According to the European Commission, additional defence and infrastructure spending alone could lift EU GDP by around 0.5% over two years, with meaningful spill‑over effects for domestic supply chains.6
4. Diversification and stability
Global portfolios have become increasingly concentrated, particularly in US assets, which now represent over 70% of the MSCI World index, despite accounting for roughly a quarter of global GDP.7 This concentration increases vulnerability to policy shifts, valuation corrections, and geopolitical shocks.
But European markets display different sector composition, revenue exposure, and macro drivers, with only around 25% of MSCI Europe revenues sourced from the US, compared with roughly 40% for US companies’ international exposure.8 Academic and market research also shows that while correlations rise during periods of stress, diversified European allocations continue to reduce portfolio volatility over full cycles.
By combining multiple asset classes and actively managing exposures, we believe a multi‑asset total return strategy can potentially enhance portfolio resilience, reduce dependence on any single growth engine, and provide stability in an increasingly fragmented global landscape.
A new Europe
Europe should not be taken simply as a contrarian tactical trade, a value diversification, or a satellite allocation. We believe improving fundamentals, attractive valuations, accelerating structural investment, and diversification benefits are collectively reshaping the region’s investment case.
While there are still uncertainties and the long-term impact of the Middle East conflict remains to be seen, we believe that the balance of risks and opportunities has become increasingly favourable for investing in Europe.
- Bloomberg/BNP Paribas
- EU defence in numbers - Consilium
- NATO defense spending: Tracking the numbers | McKinsey
- The economic impact of higher defence spending - Economy and Finance
- MSCI World Index
- Some See a Renaissance for European Equities | MSCI
Disclaimer
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Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.
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