Europe is at a pivot point, caught between geopolitical uncertainties, industrial change and an inversion of the sources of growth. Behind this volatility lies deep structural change.
Energy shock redefines the cycle
Since the end of 2025, optimism has been hit by tensions in the Gulf. Ongoing disrupted energy flows via the Strait of Hormuz have revived inflation and changed growth expectations.
Rising energy prices act as a „growth shock“: they increase production costs, compress demand and depress margins. The impact goes beyond the energy sector. Transport, materials (including fertilisers) and air travel have all suffered. European growth was expected to be in double digits for 2026, but depending on how long the crisis lasts and its impacts are felt, could now reach only 5%-10%.
However, such cyclical fragility will not mask deep transformation.
A changing Europe: from light capital to strategic assets
A striking change we have observed has been the shift from the domination of intangible assets – software and internet platforms – to infrastructure, industry and physical assets.
This shift reflects renewed investment in production, energy systems and infrastructure, particularly in Germany where fiscal easing is expected to unlock substantial spending.
In this environment, industrial and infrastructure-linked companies are regaining importance:
- Rolls-Royce1 and Safran illustrate the recovery in aerospace and long-cycle industrial demand.
- Siemens Energy embody the new generation of industrial players exposed to energy transition and infrastructure investment.
- Sandvik benefits from sustained demand for materials and mining equipment.
Our sector positioning reflects strong conviction in this shift: scarce industrial capacity and high barriers to entry are restoring value to long-neglected sectors.
The technology divide: AI winners versus losers
The artificial intelligence (AI) revolution is reshaping the equity market. But contrary to what many expect, not all tech players will benefit.
Some European industrial or technology companies may be well placed. For example:
- ASML, a leading player in semiconductor capital equipment, has experienced positive performance in recent periods.
- ASM International, also in the semiconductor value chain, has rallied in recent months, which was associated with increased AI-related capex.
- Atlas Copco offers exposure to industrial investment and automation. Its vacuum equipment is used in chip manufacturing, meaning it indirectly benefits from AI-related demand for semiconductors.
Companies involved in AI infrastructure, particularly those linked to semiconductor manufacturing, have reported an increase in relative performance. However, other areas such as software or digital services have lagged amid concerns about pressure on business models. This pattern has resulted in more concentrated returns and heightened market dependence on a small number of stocks.
Beyond macroeconomics
The transformation story is best expressed through the companies themselves and their business strategies. Here are just a few examples:
- Infineon Technologies benefited primarily from rising demand for power semiconductors, linked to electrification and energy efficiency.
- AstraZeneca embodies the resilience of European pharmaceuticals, exhibiting solid earnings growth despite market volatility.
- Legrand, a French firm involved in electrical infrastructure, is supported by data centre capex, digitalisation of buildings, and the energy transition.
These examples share one thing in common: the businesses have high barriers to entry and enjoy buoyant structural trends – energy, health and digitalisation.
In a rapidly changing environment, one thing is clear: the passive approach, which simply replicates indices, has limitations. In Europe, indices are heavily exposed to challenged sectors. This hampers performance even as compelling opportunities are found elsewhere in underrepresented areas.
An active approach
We believe active management is essential in identifying companies with pricing power and sustainable cash flows, and who can adapt to a fast-moving landscape. We call this “quality”. What makes us different as an asset manager is that while our definition of quality and the underlying philosophy remain stable, the outcomes result in portfolios that evolve dynamically, as quality is not static. We uncover new areas of quality that are emerging in unexpected areas, just as those areas that are traditionally high-quality can suffer encroaching competition and become less attractive. Our diligent research and dynamic approach can deliver good results in a changing environment.
In a world of persistent uncertainty, be it inflation, geopolitics or an unclear growth trajectory, there are several factors that support European equities over the long term. These include accommodative fiscal policy in Germany, which is reviving industrial investment, and stocks that are less richly valued than their US counterparts.
Europe is entering a new phase in economic development where the intrinsic quality of companies, rather than simple sector classification, is the key driver of performance.
