- Despite unstable external geopolitics, Europe’s broad and diverse range of high-quality businesses make fertile ground for stock pickers
- Semiconductor equipment manufacturers stand out, with orders benefiting from the AI build-out
- As Europe approaches a turning point, high quality businesses trade at attractive valuations
Europe’s equity market started 2026 on a positive note, as switching from the US to Europe and Asia continued. The Old Continent’s relative stability was the motivation. But since the war with Iran started on 28 February, stability is a much less certain prospect and inflation risk is returning.
The market obsesses about short-term geopolitics and macroeconomics. But it is companies that matter. Looking through the noise and volatility, we seek the successful business models – for the present and, crucially, for the future.
Compare the shock triggered by the attack on Iran to US tariffs last Spring, when equities corrected sharply and recovered just as sharply. The reaction hit the index but did not affect all stocks in the same way. Take for example Rolls-Royce, the UK aircraft engine manufacturer, which we have favoured. After tariffs were introduced, the share price initially declined, only to rebound. Investors realised that regardless of where engines are manufactured, the key to profits is long term maintenance; and tariffs don’t hit the maintenance business.
Europe’s broad and diverse range of high-quality businesses make it great for stock pickers. While sector and style are important to understand the backdrop, our successes have been down to stock picking. Neither value nor growth has won through, but stock selection has given us in some clear winners.
Stocks we like
Technology has led, no surprise to us. We have long recognised Europe’s strong leadership in semiconductor manufacturing through ASML and ASM International. AI means huge capital expenditure programmes at big global software and technology companies, driving demand for more and faster computer chips. When demand for computer memory increases, ASMI and ASML’s order books fill up. Both have raised earnings guidance recently and have been key winners, as has Infineon Technologies, which makes semiconductors for cars.
Companies that help generate electricity are of huge interest. Europe’s grid is outdated. In 2025, it crashed in Spain and Portugal, then at Heathrow Airport too. Today’s grid is not even good enough to meet today’s demands. Tomorrow will bring far more demand, boosted by AI’s hunger for power, and by more electric vehicles. Our portfolio holds companies like wind turbine maker Vestas and gas turbine maker Siemens Energy that are centre stage in all of this. They have excellent products catering to a growing, and a desperate need.
Returning to geopolitics, it dominates the headlines. Even before the attack on Iran, 2026 started with Trump’s decapitation of Venezuelan leadership. Closer to home for us, he made a play for Greenland but now seems to think a deal works better than an invasion.
What does this mean for markets and the companies we hold? Precious metal prices shooting higher benefits mining technology companies like ABB and Sandvik. Defence stocks continue to be a theme.
Avoiding challenges, finding gems
The Europe – US comparison was in focus at the beginning of 2025; so those making asset allocation decisions know that the dollar is vulnerable, and the US consumer is weaker than in Europe, with inflationary and debt risks.
Despite the current instability, Europe is approaching a turning point. Provided the Iran crisis does not drag on, Europe could benefit from lower energy costs, fiscal stimulus in Germany and more household consumption. Consensus expectations for 2026 are for double-digit corporate earnings growth, while high quality companies trade at attractive valuations.
Europe is a fun and profitable place to invest. But not every stock. It takes work to avoid the challenges and find the gems.
