A sceptic’s view on tips on how to put money into Europe and two of one of the best funding trusts: The INVESTING ANALYST

Europe is often viewed as a less attractive investment destination than locations such as the US.

Alan Ray, an investment trust research analyst at Kepler Trust Intelligence, explores what has changed in Europe and how to invest in it. 

Scepticism is a great tool that any investor should try to harness, no matter what market or individual company they are considering, and there’s no better example than Europe.

It’s not hard to list reasons why it’s viewed as a much less attractive investment destination than, say, the mighty US, where the S&P 500 has generated superior returns more consistently than any other major market.

And although of the most dangerous phrases in investing is ‘it’s all in the price’, it’s fair to say that even the enthusiastic European equity fund managers operate with a sense of scepticism, and have consistently low expectations for Europe’s economics and politics.

But stock market reactions are often not about certainty, but change, or its perception – and by the time certainty arrives it’s often too late.

No better example recently is the performance of European defence shares. Take Rheinmettall, Germany’s leading defence business. 

The mere thought that Germany specifically, and Europe more generally, might increase its defence spending has sent the share price skyward, up over 168 per cent since the start of 2025.

An interesting sidebar to this is that Rheinmettall’s exclusion from some institutional portfolios on ethical grounds has been reviewed as the ethics of defence, ahem, evolves. 

This is a very neat example, in that ‘more defence spending = buy defence stocks’ and investment opportunities rarely present themselves in such a simple way. But it’s a great example of how markets react to change.

Harnessing our scepticism though, we must wonder what happens when the reality of tax rises and welfare cuts to pay for it all start to bite. Something to keep on eye on, at the very least.

But more broadly, what has changed in Europe that should interest investors?

To set the scene, European equities have been turning in quite respectable returns for quite a few years and a narrative has developed that essentially says ‘never mind the economics, Europe is big enough to be home to some ‘global champions’ that compete on the world stage.‘

This has been a successful investment strategy for many, and some of Europe’s largest companies are now household names. 

Two examples are French luxury brands business LVMH, which was briefly Europe’s largest company by market cap, and pharmaceutical giant Novo Nordisk, best known for its anti-obesity drug Wegovy, which at one point had a market capitalisation higher than the GDP of its home country, Denmark.

European investors had a pretty good time with these and other ‘global leaders’ for several years. So, what’s changed more recently?

Well, first, some of those global leaders have faltered. Sceptical investors would have been wondering, with inflation rising and growth slowing, how many expensive handbags one person really needs. 

And indeed, LVMH has had a less good time recently, as its global customer base has reigned in discretionary spending.

And whereas Novo Nordisk does have a leading position alongside its US competitor Eli Lilly, it seems that first, hope began to triumph over reality in the share price and second, management made a series of well-documented missteps. So again, investors have had a less good time more recently.

But more importantly, factors I’d describe as ‘pushes’ and ‘pulls’ have developed.

One of the ‘push’ factors is a view among investors that US has reached, or even passed, peak ‘exceptionalism’.

It’s been an article of faith for many years that the US is in some way ‘exceptional’ as a place to invest, and I think that a highly educated population living in a continental sized economy with enviable natural resources, low touch but regulated financial markets, a highly entrepreneurial culture and a strong legal system are a pretty good set of factors to justify that label.

As sceptical investors, we set aside our own views about what the last year in the US will mean in the long-term and accept that global investors are now less certain about the US.

A process of diversification is underway and US equity funds are, for example, seeing a much slower flow of new investors than they have done for many years.

This ‘push’ is, at the very least, causing investors to take a fresh look at Europe. The other ‘push’ is less about politics and more about valuations: some of the largest, and even some of the smaller, companies in the US are trading at valuations that many investors feel uncomfortable with.

In taking that fresh look at Europe, investors have discovered some ‘pull factors’ that have drawn them in.

First, years of ambivalence have left European equities trading at much lower valuations that their US counterparts.

Second, say this quietly and once again with scepticism, but there are some tentative signals that European economies are doing a bit better.

Third, investors are placing quite a bit of store in Germany’s vast spending plans to upgrade infrastructure and increase defence spending.

All this adds up to a much better time for more inward looking domestic European companies and among other things, banks, cement companies and engineering businesses have been good places to invest.

In 2025 we saw an extraordinary dispersion of performance among active fund managers. 

Those holding on to global champions had a much less good time than those who looking to domestic Europe.

Two investment trusts that I follow closely have been exceptionally good at navigating the changes.

JPMorgan European Growth and Income (JEGI) mainly focuses on large companies and is a strong candidate to be an investor’s ‘core’ European equity investment. JEGI’s total return over the last five years is 109 per cent, compared to its benchmark’s 55 per cent. 

To illustrate the above point on how active managers have seen a huge variation in performance, its peer group of European equity trusts has averaged 37 per cent (figures are to the 9 March 2026). 

JEGI also pays quite a respectable dividend, and yields about 4 per cent, which may interest investors with an income requirement.

The European Smaller Companies Trust (ESCT), which has the most self-explanatory name in the investment trust sector, is a strong candidate to provide the extra juice that can be extracted from less well-researched smaller companies. 

ESCT has delivered a total return of 46 per cent in the last five years, well ahead of its small cap benchmark’s 36 per cent, but what’s interesting here is that, as yet, those investors putting more money to work in European equities haven’t really focused on smaller companies. 

A little bit of money trickling down could make a big difference. And like JEGI, ESCT pays a very attractive dividend yield of 6 per cent.

Again, stock markets often react to change, and we might also allow ourselves a brief moment of wishful thinking.

Could the re-alignment of the global chessboard we are witnessing lead to a more cohesive and decisive Europe that understands that to pay for its lifestyle and defence it needs to make some hard choices?

I feel sceptical about that, but I do think Europe is having a bit of a moment where various factors are aligning, and that it at least deserves a sceptical re-appraisal.