From the resurgence of small caps and industrials to the undervaluation of healthcare, the opportunities in European equities are compelling.

After European equities showed a resurgence against US equities this year, Matthias Born (pictured), chief investment officer at Hamburg-headquartered Berenberg Asset Management, examines the four big trends to watch out for in European equities. The editors are pleased to share thoughts on this important topic.

The usual editorial disclaimers apply. Email tom.burroughes@wealthbriefing.com and amanda.cheesley@clearviewpublishing.com

European stocks have had one of their strongest starts to a year this century. The trend actually began before ‘Liberation Day’ but has only accelerated since US President Donald Trump fired the starting gun on the US trade war. 

International investors have a huge overweight of dollar assets in their portfolios relative to history, especially in US equity markets which don’t tend to be hedged for currency shocks. There is huge potential for flows to come back to Europe. In addition, there are fundamental strengths in a variety of European sectors if you know where to look. 

Broadly, I think there are four key trends that will underpin some of the best opportunities in the European market going forwards. 

Industrial resurgence
The first key trend is industrial resurgence. In Germany, in particular, industrial conditions are improving after a grim slump. Automation and infrastructure investment is expected to pick up.

The German fiscal package, which includes significant support for industrial and defence sectors, is already having a positive impact. Companies like Siemens stand to benefit from this renewed focus on industrial revitalisation. 

This recovery is not just cyclical but structural. As Europe transitions towards more sustainable and technologically-advanced manufacturing, industrials are likely to play a central role. For investors, this means a renewed focus on companies that are well-positioned to benefit from automation, infrastructure upgrades, and reshoring trends.

Healthcare is overlooked
The healthcare sector in Europe has been largely overlooked in recent years and valuations have reached historically low levels. Although there’s uncertainty – exemplified by leadership changes at major firms such as Danish pharmaceutical company Novo Nordisk – the underlying fundamentals are actually very compelling.

Growth and earnings momentum have slowed but this is a cyclical pause rather than a structural decline. For long-term investors, the current environment presents a rare opportunity to gain exposure to high-quality healthcare names at attractive entry points. As sentiment stabilises and valuations normalise, I expect the healthcare sector to reassert its role as a core component of diversified portfolios.

Small cap renaissance
After years of underperformance and capital outflows, European small caps are showing signs of a robust comeback. Particularly since Liberation Day, small caps have outperformed their larger peers. Historically, small caps have struggled in volatile environments, but this time, the reversal appears to be driven by a shift in investor flows.

The return of capital to this segment suggests renewed confidence in the growth potential of smaller, more agile companies. This trend is particularly encouraging for active managers, as it opens up a broad universe of opportunities. In a market where stock selection is once again paramount, small caps offer fertile terrain for alpha generation.

Resilience and political stability
One of the more underappreciated strengths of certain European companies today is their relative insulation from global trade tensions. While tariffs remain a concern, their impact on some companies and in some sectors has been very muted. 

For a start digital, service, financial, and non-US exposed businesses are unlikely to be affected directly at all. Secondly, companies with solid pricing power and high gross margins are unlikely to see a significant impact on their earnings. Tariffs are generally applied to import prices, meaning that companies with large markups on their final sales prices are relatively less affected. Companies have also adapted by pre-buying inventory and adjusting supply chains, and earnings season has shown little evidence of tariff-related disruptions.

Compared with the US, Europe is also enjoying a period of relative political stability. This provides a more predictable backdrop for corporate planning and investment, which in turn should support equity performance.

A stock picker’s dream
The current environment is a stock picker’s dream. With only a handful of stocks driving index-level returns, active management is essential. Growth investing is gaining traction again, and international investors are taking notice.

In conclusion, the European equity landscape is evolving in ways that favour thoughtful, active investment strategies. From the resurgence of small caps and industrials to the undervaluation of healthcare the opportunities are compelling. For investors willing to look beyond the headlines, Europe offers a lot of potential.