Europe’s economy may lag the US, but its companies are telling a different story
Eurozone growth remains modest, yet investors are finding opportunities in globally dominant European companies, from ASML and luxury groups to banks, defence manufacturers and electrical infrastructure specialists. With around two-thirds of listed European companies’ revenues generated outside the region, the investment case for Europe increasingly depends less on GDP growth and more on the global reach of its corporate champions.
Europe continues to face an uncomfortable comparison with the United States. Its economy grows more slowly, it lacks a Silicon Valley equivalent and its stock markets do not possess a group of technology giants comparable in scale with America’s largest companies.
Yet judging European investment opportunities solely through those indicators may obscure a substantially different picture at corporate level.
Eurozone economic growth has edged up to around 1.2%, but remains below that of the United States. For investors, however, domestic GDP provides only part of the story because many of Europe’s largest listed businesses operate as genuinely global companies.
According to investment managers consulted by QuotedData, approximately two-thirds of the revenues generated by companies in the MSCI Europe ex UK index originate outside Europe. In other words, investing in European equities does not necessarily mean making a direct bet on European economic growth.
Instead, the continent offers a combination of specialised industrial technology, globally recognised consumer brands, financial institutions, advanced manufacturing and companies positioned to benefit from artificial intelligence, defence spending, electrification and the reorganisation of global supply chains.
Europe’s corporate economy extends far beyond Europe
The distinction between where a company is headquartered and where it generates its revenues is particularly important when analysing European markets.
Europe has historically developed powerful export industries. German engineering, French and Italian luxury, Swiss industrial technology, Dutch semiconductor equipment and Scandinavian manufacturing are sold throughout the world.
Marcel Stotzel, manager of Fidelity European Trust, estimates that around two-thirds of revenues among MSCI Europe ex UK companies come from markets outside the region, describing Europe as fundamentally export driven.
This changes the investment equation.
A company headquartered in Amsterdam, Paris, Milan or Zurich may be listed on a European exchange while its actual growth depends heavily on demand in the United States, Asia, the Middle East or emerging markets.
Weak European GDP growth therefore does not automatically imply weak growth for European corporations.
ASML demonstrates Europe’s technological strength
Few companies illustrate the argument more clearly than Dutch semiconductor equipment manufacturer ASML.
The company occupies an extraordinarily powerful position in extreme ultraviolet lithography, the technology required to manufacture some of the world’s most advanced semiconductors.
Its importance extends far beyond the European technology industry. The equipment it produces sits inside the global semiconductor supply chain that underpins artificial intelligence, cloud computing, smartphones and increasingly sophisticated industrial systems.
For investment managers, ASML demonstrates that Europe does not necessarily need its own equivalent of the largest US digital platforms to participate in the technology revolution.
It can instead dominate critical parts of the infrastructure that make those technologies possible.
Luxury provides another European competitive advantage
Technology is only one part of the picture.
Europe possesses some of the world’s most difficult-to-replicate consumer brands.
Groups such as Richemont and Italy’s Moncler demonstrate the competitive advantages accumulated by European luxury businesses through brand heritage, craftsmanship, distribution networks and pricing power.
These companies may be European by origin and headquarters, but their customer base is global.
Demand from wealthy consumers in Asia, the United States and the Middle East can therefore matter as much as economic conditions in their domestic markets.
This is one reason investment managers increasingly argue that Europe should be viewed as a collection of specialised corporate ecosystems rather than a single slow-growing economy.
Different parts of Europe offer different strengths
The corporate landscape also varies significantly across the continent.
Northern Europe provides technology platforms, digital infrastructure and advanced industrial businesses.
Southern Europe offers financial institutions whose profitability has improved substantially in recent years, alongside consumer companies capable of maintaining strong pricing power.
Central and Eastern Europe, meanwhile, contain rapidly expanding banks and retailers benefiting from economies that in many cases still have greater convergence potential than Western European markets.
That diversity is important.
Europe may lack the enormous concentration of technology companies found in the United States, but it offers a much broader mix of industries, ownership structures and specialised niches.
Europe participates in AI through the infrastructure behind it
Artificial intelligence provides perhaps the clearest example of how European companies can participate in a global technological boom without necessarily developing the most famous AI models.
ASML supplies essential semiconductor manufacturing technology.
French industrial group Legrand operates further down the infrastructure chain.
The company produces equipment required to operate data centres, including server racks, power-distribution units and systems designed to manage the physical infrastructure surrounding computing equipment.
As AI models become larger and require increasingly powerful computing capacity, demand for data centres, electricity and cooling infrastructure rises accordingly.
That creates opportunities for businesses that may appear to belong to traditional industrial sectors but are actually becoming critical suppliers to the AI economy.
Europe’s exposure to artificial intelligence is therefore not confined to software.
It also exists in the semiconductor machinery, electrical systems, automation and physical infrastructure needed to run the technology.
An industrial base that is difficult to replicate
Europe’s universities and engineering ecosystem continue to produce highly specialised expertise, while the continent retains a substantial industrial base in areas such as electronic equipment, hardware and precision manufacturing.
That may become increasingly valuable as governments and corporations reconsider where strategic products should be manufactured.
The pandemic, geopolitical tensions and growing rivalry between China and Western economies have exposed the risks of highly concentrated global supply chains.
As a result, reshoring and regionalisation are moving from political slogans toward corporate investment decisions.
European businesses increasingly want critical technologies and defence components manufactured closer to home rather than depending entirely on Chinese suppliers.
Defence spending creates a new European growth engine
One of the most important changes is occurring in defence.
For decades, defence expenditure represented a relatively weak growth area across much of Europe.
That has changed dramatically.
Governments are committing substantially more resources to military capabilities and strategic autonomy, creating opportunities not only for major defence contractors but also for the vast network of electronics manufacturers, component suppliers and engineering companies that support them.
QuotedData highlights Norway’s Kitron, a contract manufacturer of electronic products, as one of the companies positioned to benefit from the trend.
The investment impact can spread far beyond weapons manufacturers themselves.
Higher defence spending creates demand for electronics, communications systems, industrial components, cybersecurity, logistics and specialist manufacturing.
Reshoring becomes a strategic priority
Defence overlaps with another increasingly important theme: European supply-chain sovereignty.
Governments and companies have become more reluctant to depend on China for components considered strategically critical.
This does not imply the disappearance of globalisation.
Rather, it represents a selective reorganisation of supply chains in sectors where security of supply is becoming as important as cost.
For European industrial companies, the change could create a significant domestic investment cycle.
Production that was previously outsourced abroad may return to Europe, while new factories require automation, electrical equipment, logistics infrastructure and specialised suppliers.
The beneficiaries can therefore extend throughout the industrial ecosystem.
Europe’s domestic economy is becoming more relevant
For years, the strongest argument for European equities was largely international: buy European companies because they sell successfully elsewhere.
That may now be changing.
Some of the strongest-performing European sectors in recent years have been distinctly domestic, particularly banks and defence.
According to Fidelity’s Stotzel, this is creating new growth drivers for the roughly one-third of MSCI Europe ex UK revenues that are actually generated inside Europe.
The shift is significant because it gives investors a second potential engine.
European companies can continue benefiting from global demand while simultaneously gaining exposure to a recovery in domestic investment.
Fiscal expansion could reshape the investment landscape
European governments are preparing to spend considerably more on defence, infrastructure, industrial capacity and energy systems.
Investment managers expect this fiscal expansion to extend through the remainder of the decade.
Every new factory, data centre, port upgrade or industrial project has something in common: it requires electricity.
That places electrical infrastructure at the centre of Europe’s investment cycle.
Years of limited investment mean grids need to be expanded, modernised and redesigned to accommodate new industrial facilities, renewable energy and rising electricity consumption.
Swiss engineering group ABB is one company exposed to this transformation through products including circuit breakers, switchgear and grid-automation systems.
Banks could benefit from Europe’s investment cycle
Higher public and private investment also has implications for the financial sector.
Italian banking group UniCredit is cited as an example of a company potentially positioned to benefit from greater economic activity.
More infrastructure spending and corporate investment can generate additional demand for loans, transactions and financial services.
This represents a substantial reversal from the environment European banks faced for much of the decade following the sovereign debt crisis, when ultra-low interest rates and weak credit growth compressed profitability.
Banks have already been among Europe’s stronger-performing domestic sectors, and an extended investment cycle could provide additional support.
The energy transition requires rebuilding Europe’s grids
Europe’s energy system provides another major source of potential corporate investment.
The continent has experienced two major fossil-fuel shocks in four years, strengthening political pressure to accelerate electrification and reduce dependence on imported hydrocarbons.
But generating renewable electricity is only one part of the transition.
Europe also needs grids capable of moving that electricity between producers, cities, factories, data centres and households.
Much of that infrastructure requires substantial investment after years of underdevelopment.
Companies involved in grid construction, management and modernisation could therefore benefit from a multi-year capital expenditure cycle.
QuotedData identifies Germany’s E.ON among businesses exposed to grid redesign, alongside specialised technical-services providers.
Europe may become a market for stock pickers
The continent’s corporate diversity also creates a challenge.
European equities do not move uniformly.
QuotedData notes a 127% difference in share-price performance between the best and worst investment trusts in the European sector over five years.
That dispersion suggests that simply identifying Europe as attractive or unattractive may be too simplistic.
The results can vary dramatically depending on sectors, individual companies and investment strategies.
It also strengthens the argument that Europe may be particularly suited to selective investing: identifying companies with structural competitive advantages rather than relying on broad economic growth to lift the entire market.
Europe’s weakness could also be its opportunity
The comparison with the United States remains unavoidable.
America has produced the world’s dominant digital platforms, enjoys deeper capital markets and continues to grow faster than the eurozone.
Europe cannot simply ignore those structural disadvantages.
But investors increasingly distinguish between Europe as an economy and Europe as a collection of companies.
The former continues to struggle with relatively weak growth, demographic pressures and fragmented markets.
The latter includes global leaders in semiconductor equipment, luxury goods, electrical infrastructure, industrial automation, banking, advanced manufacturing and increasingly defence.
And those businesses are positioned around some of the largest investment themes of the coming decade: AI infrastructure, electrification, reindustrialisation, defence and supply-chain regionalisation.
Europe may still lack the economic dynamism and technology-market concentration of the United States. But with roughly two-thirds of listed companies’ revenues generated outside the region — and a new domestic investment cycle emerging in defence, infrastructure and energy — the continent’s corporate story may be considerably stronger than its headline GDP figures suggest.
