While US markets suffer from a drawdown of over 10% so far this year, investor attention is drawn elsewhere. European investors withdrew from US equity ETFs while European ETFs recorded an inflow of EUR 14.6 billion between mid-February and March, according to Morningstar. To put data into perspective, throughout 2024, European equity ETFs took in EUR 11.9 billion. Year to date, the Morningstar Europe Index is up 7.3%.
Meanwhile, a 25% US tariff on imported cars and light trucks could hit European automakers hard, and high geopolitical and policy uncertainty drives the European Central Bank (ECB) to lower its growth forecast again and raise its 2025 inflation outlook. Â
The appetite for European equities improved, and inflows into the region continued. We gathered views from fund managers about what could swing its outlook.
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#1 Defense spending amid ongoing wars
This is an excerpt taken from a commentary by Invesco published on 19 March 2025.
The Trump administration has been insisting that its NATO allies in Europe more equitably share the cost of defense. Though with the US commitment now in doubt, Europe needs their own deterrents from the East. Already, the EU and UK have made plans to raise defense and infrastructure spending by over US$1 trillion in the coming years.
The newly expected economic boost from raised defense spending is further helping European markets. The good news is that they remain relatively attractive (based on cyclically adjusted price-to-earnings ratio).
This is an excerpt taken from a commentary by AllianceBernstein published on 18 March 2025.
Since the start of the Russia-Ukraine war, European equities have suffered cumulative outflows of US$150 billion, according to Citigroup. The war has also had a profound negative impact on investor sentiment, which affects flows, valuations and the energy markets; energy costs are still 75% above pre-war levels. This, in turn, contributed to inflationary pressures, weaker consumer confidence and poor economic growth.
To be sure, the realignment of geopolitics around Trumpâs foreign-policy agenda makes it hard to predict how the next stage of the Russia-Ukraine war might play out.Â
Progress toward a ceasefire wouldnât immediately solve Europeâs problemsâsome of which appear structural. Still, it would certainly be a step in the right direction toward improving the macroeconomic backdrop.
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#2 Deep discount versus US markets
This is an excerpt taken from a commentary by Janus Henderson Investors published on 28 March 2025.
The fortunes of European equities have turned thus far in 2025, with European indices like the STOXX Europe 600 Index hitting their highest level this century after a long period of stop-start progress and setbacks. The last decade has been tough for European equities, but can this glimmer of hope become something more meaningful and longer-lasting?
Attractive European stock valuations and very low international investor positioning seemingly provide a safety net for further progress.
Europe remains deeply discounted versus the US (P/E ratio)

This is an excerpt taken from a commentary by Fidelity International published on 6 March 2025.
In the US, narrow market conditions and companies with strong ties to artificial intelligence or those perceived to be beneficiaries of policies from the Trump administration are leading equity returns, resulting in rich valuations.Â
Even if we strip out these differences in concentration by comparing US and European equal-weighted indices, the latter still screens at a valuation discount of 30%. Some of this discrepancy is explained by the marketâs belief in US exceptionalism in contrast to Europeâs subdued economic outlook.Â
Resilient economic data, strong corporate earnings, falling inflation and easing monetary policy have supported US equities, but we are starting to see the marketâs conviction in US dominance waver. By contrast, the degree of pessimism towards Europe may be overplayed given that core inflation is contained, and lower interest rates help boost corporate capital expenditure and lift consumer confidence. As such, there may be an upside for European stocks on any incrementally positive news flow.Â
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#3 Momentum of more aggressive easing
This is an excerpt taken from a commentary by Fidelity International published on 6 March 2025.
The ECB expects eurozone inflation to be close to the 2% target from Q2 2025 as the effects of past energy price shocks and labour cost pressures fade, and the lagged effects from monetary tightening continue to feed through to consumer prices.Â
This would provide cover for the ECB to continue cutting interest rates, which would encourage business and consumer spending. Indeed, the current household savings rate in Europe is 15.6% â around 3% above average. Any reduction in the savings rate towards its historical mean could deliver a meaningful uplift to GDP growth.
Fidelityâs macro team expects the ECB to cut rates this year more aggressively than the market is pricing, which should boost capital-intensive sectors such as industrials as companies take advantage of cheaper financing conditions.
âThis is an excerpt taken from a commentary by PIMCO published on 6 March 2025.
The disinflation process remains on track, and inflation has developed broadly in line with previous staff projectionsâŚ
For inflation to evolve in line with ECB expectations and durably converge to target, growth in unit labour costs falling back to levels that are broadly consistent with 2% inflation remains the most important prerequisite. Services inflation is still elevated, at 3.7%, and a sustainable decline requires additional deceleration in wage growth, even more so as productivity might continue to disappoint.
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#4 Tariffs, fragile growth, and other challenges
This is an excerpt taken from a commentary by Franklin Templeton published on 24 March 2025.
A primary risk is that of escalating tariff wars, which could potentially erode economic and financial confidence, precipitating a significant economic slowdown or even recession.
Like other investors, we struggle to quantify the probability of trade war escalation. The concern is not that Europe is highly dependent on exports to the United States (which make up less than 10% of total exports for most European countries). Rather, the concern is the uncertainty a trade war could inflict on all economies.
âThis is an excerpt taken from a commentary by Janus Henderson Investors published on 28 March 2025.
External pressures on Europe have become enormous, an area where Europe is vulnerable, given that its overseas trade-to-GDP ratio is above 60%. World Trade Organisation (WTO) rules have benefited Europe (and China) over the past few decades, but this settled system is now under existential threat.Â
Europe is very dependent on imports for critical raw materials and digital technology, while geopolitical fault lines are fracturing and being realigned without much consideration for European interests, given its lack of political or military muscle (and assertiveness).
Europe reaped the post-Cold War peace dividends for decades and now needs to adapt â quickly â to develop its own defence capabilities. The US, Europeâs long-time friend and strategic partner, is now following its own agenda in geopolitical realignment and military strategy. China is pressuring European manufacturing and intellectual property. Europeâs key automobile and semiconductor industries are now firmly in the crosshairs.
This is an excerpt taken from a commentary by PIMCO published on 6 March 2025.
The euro area economy continues to stagnate, growing well below trend. In February, the composite Purchasing Managers' Index (PMI) remained at 50.2 points, disappointing expectations. Coupled with Januaryâs PMI print, this seems consistent with growth of around 0.1% quarter-on-quarter.Â
The ECB lowered its growth projections once again, and continued to characterise risks to growth as tilted to the downside. The March staff projections see growth at an average: 0.9% in 2025, 1.2% in 2026, and 1.3% in 2027.
Incoming data continues to ask the question of what should drive the projected economic expansion, as none of the demand components has shown the decisive strengthening foreseen in consecutive ECB staff projections. Particular question marks surround the consumption-led growth in economic activity in the projections, with the data pointing to an elevated savings rate and weak consumer confidence instead.
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Read before you bet on a single market or region
Investors are better served by adopting a long-term investment perspective that focuses on the time-tested and sustainable aspects of the growth in their allocations. This comes from an allocation that is sufficiently diversified across geographies and asset classes.Â
The core-satellite approach helps form the foundation of a holistic investment portfolio. The core allocation serves as the anchor for an investor's asset allocation, generating long-term, stable market returns and compounding wealth over time.
High conviction in a sector or region can be expressed through a satellite position, which is typically more concentrated. However, one should caution against building whatâs called a âsatellite-satelliteâ portfolio, which exposes oneâs wealth to excessive concentration risks.Â
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