“Although the US is home to high-flying technology firms that are driving the AI revolution and companies also benefit from lower energy costs than their European counterparts, it is questionable whether the environment is that much better than in Europe,” says Halle. The outlook for Europe is not as bad as feared and, in Halle’s view, the discount is not warranted.

The diverging fortunes of US and European equities this year suggests that investors might be starting to agree with Halle. Europe’s renaissance is still nascent and it remains to be seen whether the trend gains momentum. However, there are arguably some significant political and macroeconomic developments taking place that could support a more optimistic long-term investment outlook for the continent.
 

Trump forces Europe to act

A notable, and rather unexpected, catalyst behind the revival of Europe this year is US President Donald Trump. Since returning to the White House, Trump has disrupted the economic landscape with a series of proposed tariffs on imports. He has also upended the geopolitical landscape by indicating that the US might reduce its commitment to European defence. 

In response to Trump’s ‘America First’ agenda and Europe’s apparent need to stand on its own two feet, European policymakers have announced policies that could not only deliver security but also provide a long-term economic boost to the region. 

Most significantly, Germany’s chancellor-in-waiting4, Friedrich Merz, announced a huge investment in infrastructure and defence, saying that Germany would do whatever it takes to secure freedom and peace. The decision to reform the so-called “debt brake”, which has limited the country’s budget deficit to 0.35% of GDP, to enable greater spending is arguably evidence of the seismic shift under way. 

Combined with the European Union’s plan to increase defence spending by €800 billion over the next four years, Germany’s fiscal largesse could significantly invigorate economic activity in Europe. 

From an investment perspective, defence companies clearly stand to benefit significantly from Europe’s military build-up and their share prices have been among the best performers this year. 

But the spending could permeate down to all parts of the European industrial complex. Companies in the steel and cement industries, which have struggled from subdued demand in recent years, could benefit from the effective reindustrialisation in Europe. If economic growth picks up as a result of this investment, interest rates may have to stay higher for longer, which could be helpful for Europe’s banks. A more buoyant economic environment could also feed through to consumer spending.
 

A favourable environment for value

While Europe’s economy could be vulnerable to a protracted trade war with the US, as well as any wider slowdown in the global economy, the proposed stimulus measures potentially provide a very positive backdrop for investment in the region. 

Halle is optimistic about the outlook for European equities currently, and especially for cheap, unloved value stocks. “There is a perception that value investing is old news, but in Europe the value style has been thriving,” he points out. 

Having been out of favour for so long, it’s taking time for investors to recognise that value investing works but he believes the case for European value is compelling right now. Halle highlights the wide spread in valuations between the cheapest and the most expensive stocks as creating a favourable environment for value investors. 

With value opportunities on offer right across the market rather than being confined to a few sectors or regions, Halle says European value investors can construct diverse portfolios of attractively valued, well-managed, decent companies. Importantly, there is no need currently to invest in distressed or restructuring companies. “Value investors today can find attractive opportunities without sacrificing very much quality or growth. It is a very exciting time,” says Halle.