The manager of a fund at Chelverton Asset Management explained why smaller European companies, and others, have a chance to emerge from under the shadows of a once-dominant US economic story with potential big expansion of fiscal spending policy in the EU, particularly Germany.

European equity markets could benefit from the large fiscal package by Germany, and the wider European Union, to boost defence and infrastructure spending. And with European companies still offering examples of cheap valuations as prices take time to react to new realities, it is a market offering potential.

That’s the argument of Gareth Rudd, on the European investment team at UK-based Chelverton Asset Management. He recently spoke to journalists about the Chelverton European Select Fund and its strategy.

The fund has a 70.5 per cent exposure to Europe (15.2 per cent to Americas and 10.6 per cent to Asia). In the past, this tilt towards Europe was a headwind, but given the boost to Europe this year from the defence/infrastructure spending uplift, that high exposure to Europe could turn into a “tailwind,” the firm said. According to figures from Factset on 18 March, the geographic exposure of top 10 companies in the Europe ex-UK Index showed the Americas at 40.7 per cent; Europe at 28.6 per cent, and Asia at 24.9 per cent. 

“Europe has been a poor relation for a long time,” Rudd said. “People are starting, however, to question whether they are going to get a return out of the (pro-US tilt) …it is getting people to stop and think.”

The US tariff move, the challenge to US AI dominance from offerings such as China’s DeepSeek app, and policymaking volatility, have questioned investment assumptions about US “exceptionalism”, Rudd continued. 

European financial markets soared in March in response to Germany's announcement – coinciding with recent federal elections – to bolster defence spending. The EU plans to unlock nearly €800 billion ($873 billion) to bolster security as the US has suspended military aid to Ukraine and turned up pressure on the Ukrainian government to reach a peace deal.

The EU's “Rearm Europe” package involves the activation of the national safeguard clause of the Stability and Growth Pact, enabling EU countries to increase their defence spending by an average of 1.5 per cent of GDP, or €650 billion that could be released over the next four years. It also entails a "new instrument" to provide €150 billion in loans to member states to finance joint defence investments in pan-European capabilities.

Clichés with a hint of truth
Certain views about regions remain quite entrenched, Rudd said, quoting the line that has held for some time about how the “US innovates, China replicates and Europe regulates.” 

But while fiscal policy loosening in Europe is a positive for equities, there are risks if the US and other countries go into a recession, Rudd said. Chelverton is a relatively cautious investor, preferring companies with a proven ability to generate cash now, and not in some hypothetical future, he continued. 

Chelverton has an “aversion” to debt; on average, the firms it holds have a lower net debt/earnings before interest, taxation, depreciation and amortisation ratio than the wider market. This is important: “When times get tough, banks pull the plug [on lending],” Rudd said.

If there is a significant shift in capital from the US to Europe, it would not require a “huge repatriation” of funds to have a large boost for the European equity market, he said.

Asked about specific company holdings, Rudd said the fund took profits in 2024 on Germany’s Rheinmetall, for example, and switched to France’s Dassault Aviation (a defence play), Cicor (electronic solutions in areas such as aerospace, industry, defence, medical and building), and Amadeus FiRe (Germany-based employment services), and JDC (a software platform business that is digitalising the German insurance sector). 

Rudd argued that initially, capital flows out of the US and into Europe go via the route of exchange-traded funds, with large-cap stocks seeing the most action. However, at some point if this process continues, smaller companies will benefit. “That’s the hope,” Rudd said. 

Rudd said the Chelverton European Select Fund was not a fund “for all weathers” and would likely underperform a sharp cyclical rally, or sharp move up in highly leveraged companies.

The fund is a Europe ex UK equity fund; it invests solely in the equity securities of companies listed in Europe, but outside the UK, across the size spectrum down to a minimum market capitalisation of €50 million. As of 31 March, the fund had £198 million ($264 million) in assets. 

The Chelverton European Select B Acc data shows returns since launch of 70.6 per cent to the end of April 2025, versus the IEurope ex-UK Small Cap NR EUR benchmark result of 41.4 per cent.