European equities are getting more interesting, say asset management and private banking experts at Quintet, Pictet and Artemis Investment Management in Luxembourg.
European stocks saw a strong start to the year, with the Euro Stoxx 50 Equity index rising more than 10 percent since January, while the European Commission’s autumn 2025 economic forecast, released in mid-November, projects real GDP to grow by 1.4 percent in the EU in 2025 and 2026.
“Continued growth in the third quarter is testimony to the resilience of the European economy and its ability to navigate unprecedented shocks,” said the commission. And European stocks are expected to perform better in 2026, according to J.P. Morgan research published in early November.
So how are investors addressing this growth story?
“We are currently overweight European equities in our tactical asset allocation for several reasons,” Daniele Antonucci, chief investment officer at Quintet Private Bank, told Investment Officer. “First, we think valuations are attractive versus the US. Second, we like long-term structural themes, including extra spending on defense, infrastructure and the energy transition.”
“Third,” he added, “while the US is a ‘growth’ market that’s exposed to sectors such as technology and communication services, Europe provides diversification via exposure to other sectors, including financials and industrials. More strategically, given some of these thematics, we tend to allocate to Europe more than its weight in global equity markets.”
European banks’ profitability soars
Indeed, when it comes to the financial sector, European banks have seen exceptional results over the last few years.
“Post-financial crisis, banks went through a very difficult period where regulation increased quite dramatically, which required them to shore up their balance sheets and protect against a similar event. And that was very painful for banks’ profitability,” Harry Eastwood, investment director at Artemis Investment Management, told Investment Officer.
“Some of the banks’ main return drivers being the interest they get on deposits, and how that compares to the interest rates they get when they’re loaning money. If you have low interest rates, that spread is very, very narrow. What you saw, coming out of Covid, was inflation and interest rates picking up. Net interest income grew, and so profitability grew.”
For Luxembourg banks in particular, net interest income generated by banks grew by 4.4 percent in 2024 compared to 2023, according to the profit and loss account of credit institutions published by the country’s financial supervisor, the CSSF. Net interest income soared by 50.9 percent in 2023 compared to 2022, thanks to the rise in interest rates.
Luxembourg bank’s net profit rose by 10 percent in 2024 compared to 2023; it grew by 67.3 percent in 2023 when compared to 2022.
Cheap valuations and fundamental performance
Eastwood expects European banks to continue to perform well, despite the decrease in interest rates. Like Antonucci, he points to attractive valuations. “What we look for is cheap valuations; we look for continued fundamental performance,” Eastwood said. Banks in Europe have “performed exceptionally well over the past three years,” but the sector has also “experienced the largest upgrades to profit forecasts by the analyst community. We like that characteristic; we like upgrades to forecasts; we like it when that occurs at a discounted valuation. So that’s why I say we think the setup looks quite good.”
There is, however, a caveat. “If the data changes, and we go through Q3 earnings and there’s some stress on their loan books—which doesn’t look like there is at the moment—then we’ll be very happy to adjust the portfolio to other areas that look more interesting. But it’s been an interesting sector. I think over the past three years, the banks—European banks—have out-performed the Mag 7. That’s quite an amazing thing, given that they’re pretty boring businesses and they’re up against AI.”
Eastwood has also observed a “buyback theme” in the banking sector. As he explained, “if you’re buying shares at discounted valuations, that’s very accretive in the long term to your earnings growth profile, because essentially, there’s the same earnings profile, but with less shares. So the earnings growth—EPS, earnings per share—goes up exponentially. That’s quite an interesting theme that we’re seeing. We’re seeing it with the UK banks as well.”
Pictet sees slower earnings growth
Christopher Dembik, senior investment adviser, Pictet Asset Management, also sees the European financial and industrial sectors as attractive. “While European stocks’ valuations remain attractive, they need stronger earnings growth and a transmission of fiscal stimulus into the real economy, especially as we have early evidence of softer money and credit growth,” he told Investment Officer.
Pictet expects corporate earnings growth in Europe to slow to below 4 percent next year from 4.2 percent in 2025, in a sharp contrast to the consensus estimate for nearly 15 percent. “We prefer to remain selective and buy the region’s industrials, financials and midcap stocks, which have outperformed the S&P500 index over the past two years,” Dembik said.