15 July 2025

Owning the things that “worked” in the last cycle, or even during the first phase of the European equity market recovery may not be the most prudent course of action now. But there is an alternative, says James Sym, Partner and European equity specialist at Goodhart Partners LLP.

At the time of Donald Trump’s now-infamous “Liberation Day,” I argued that POTUS 47’s policies would be better, in aggregate, for the Old Continent than for the United States, in that they would catalyse the continued and underappreciated reform Europe is undergoing, and I continue to believe that to be the case.

European equity markets of course rallied sharply in the aftermath of the tariff announcements, but some months on, this begs an obvious question; is the new-found enthusiasm for European equities out of steam, or do opportunities remain?

Of crucial importance to understanding the prospects for European equity investors from here is to note that the index moves seen in the first half of the year mask a complex picture. What has been witnessed so far was essentially a classic market Renaissance driven by a “dash for trash,” in which a narrow sub-set of classic “value” stocks were the overwhelming beneficiaries, with notable examples including banks, insurers, telcos and energy stocks.

So sharp was the rally in some of these areas that it has left valuations in many cases at roughly decade highs. This value-orientated investor, however, no longer considers them good “value.”

Though it is understandable why these stocks have done so well since inflation returned to the system in 2022, the fact they are now on multi-year high valuations should make value disciplined investors – those who assess “value,” rather than just “buy cheap” – consider whether the excess returns to these areas have already been had. This would be our view for both valuation and fundamental reasons.

However, while deep value stocks have outperformed, and the European market has done well, it would appear that the asset allocation “tanker” is yet to start turning. When this happens, market leadership is likely to change significantly and persistently.

Essentially, what happened during the long post-GFC cycle – where the growth style was so successful – was that investors ended up with a huge over-allocation to this type of asset, namely growth stocks (and funds) in their portfolios. By 2021, after a decade of significant outperformance for these companies, it was rare to find any other type of fund in investors’ portfolios, as evidenced by the predominance of the growth style within the largest funds in European sectors.

In 2022 this proved to be very painful, with the return of inflation damaging long-duration assets. Clients suffered significantly, and action needed to be taken against the broadly extreme positioning many found themselves with. The response was then to “barbell”: adding to the deep value style – banks and telcos for example – which in turn drove the valuations to the levels we see above.

Of course there are all the stocks between these two extremes: sensibly priced and with good fundamental metrics, which don’t fit neatly into either bucket. But asset management industry dynamics – where to raise assets it is essential to sit firmly in one or other of the value or growth buckets – have led to a dearth of investment capital allocated to this area. Furthermore, the shift towards passives led to the underperformance of smaller capitalised companies, which drove further asset flow away from this part of the market.

The argument is that the asset allocation dynamics described above leave the small and mid-sized compartment of the market anomalously valued, particularly outside the extremes of deep value and high growth. This has created perhaps one of the most contrarian opportunities in my career, and one (investing in small and mid-caps) which has a long track-record of delivering medium-term outperformance, even without the deeply discounted starting valuations we see today.

For hard evidence that the phenomena described above are indeed reflective of reality, analysis of European equity fund holdings data reveals further insights into how the initial stages of the European equity market Renaissance have played out. It clearly demonstrates how positioning within Europe has become driven increasingly towards large-cap value and growth stocks, creating the opportunity in small and mid-caps we describe today.

At the time of writing, over 90% of all fund assets in the IA Europe ex UK Sector are in large-cap strategies, while very little is in small/mid-cap strategies with non-extreme style metrics (either to value or growth). This applies equally to the actively-managed sub-set of funds.

Our strategy sits in a style category which precisely 0% of other assets – whether including or excluding passives – also sit. That’s a category where valuations are at all-time relative lows and performance for obvious mostly technical reasons has been poor. It doesn't get more contrarian than that!

The implication of this analysis, at face value, is that fund buyers and asset allocators comprising 0% of overall assets, believe that the small/mid-cap portion of the European equity market will be the best-performing sub-set of the overall market in the coming years.

This cannot possibly be aligned with the likelihood of it actually outperforming in the coming years, from a common-sense and historical point of view. It is all the more surprising considering not only the valuation disparity that has arisen between different areas of the market cap spectrum, but also given the historical cyclicality of flows. Of course, this isn’t an explicit view allocators are taking, and most will acknowledge the absurdity of the implication, but it is nevertheless where assets have ended up.

Were the market view to change, and we think it will, there will be a very large herd to stampede through a very narrow doorway. Perhaps despite better domestic European fundamentals and historically low relative valuations, the likelihood is only 50% that these companies will outperform in future, in aggregate. But even then hundreds of billions of global assets would need to shift into this area to fairly reflect that possibility. If they start to outperform, the asset allocation shift will need to be even greater and faster.

Two historical analogies spring to mind, namely peripheral-listed companies in 2013, as “Do whatever it takes” was uttered, and financials in 2021, as inflation started rearing its head. Pre-positioning will be essential.

We now turn to the fundamentals of this part of the market, starting with valuations. In the period since the global financial crisis, mid- and smaller-cap European companies have never traded at a deeper discount to their large-cap peers than in recent months, while on a global basis, large-cap growth stocks have moved firmly into valuation bubble territory.

Given that “classic value” sectors such as banks, telcos and insurers are trading at multi-decade valuation highs, I believe many investors would do well to reconsider whether this is the right point in the cycle to allocate meaningfully to these stocks and sectors, as they are doing. Of note is that I make this observation as a portfolio manager who held a roughly 10-year overweight exposure to banks at a time when this was a decidedly unfashionable position.

Put simply, how “value” is defined can and does change over time, and portfolios must change to reflect this.

For investors considering their allocations to European equities as we enter the second half of 2025, I am firmly of the belief that there are opportunities to consider an investment strategy that is specifically positioned for “phase two” of a European Renaissance, which has the potential to be longer and more persistent than the first phase.

The ongoing case for Europe

The pre-covid cycle clearly belonged to big tech, and by extension the US. The US outperformed Europe on a fundamental basis, based on profit growth and also benefited from increasing relative valuations. However, in the aftermath of the pandemic, US companies underperformed their European peers on earnings, yet continued to outperform in terms of stock price returns.

As such, there is plenty of evidence to show that the more recent reversal in market leadership was absolutely justified. I believe that it will continue.

After the initial reallocation to Europe that occurred in phase one, the key issue some investors are overlooking is the type of European exposure best placed to benefit from continued inflows. If much of the return from phase one of the European Renaissance was driven by classic value stocks, then what has been left behind are the more interesting opportunities in the middle of the style and size scales. As mentioned above, this is precisely the area we are exploiting in our strategy, at a time when very few others are doing so.

Contrasting fundamentals

It is no secret that investors have started to buy back into Europe, and I take my hat off to those who have been in – and overweight – Europe over the last five years (or even the last three or two years, or 12 months, for that matter). Statistically, they are in a tiny minority, which suggests that most people reading this article most likely haven't been. It seems probable that the trend of inflows to Europe will continue, but my contention is that it is what investors buy from hereon in that will truly matter.

The US continues to look challenged from a valuation, fundamental and geopolitical standpoint. It has significant problems in terms both of its debt pile and its fiscal position, compounded by its limited room for manoeuvre from a monetary perspective. Europe, by contrast, has much greater flexibility: inflation is lower, and most debt-to-GDP ratios are falling. This is happening especially rapidly in the most highly geared countries, such as Spain and Greece. France and Belgium are two outliers where work remains to be done, but even they are by far more sustainably placed than the UK or the US.

Germany’s debt-to-GDP ratio now stands at 66%, while Europe’s aggregate figure is 83%, and falling. Funding costs are around 3%. Meanwhile, budget deficits are below 3%, thanks to a combination of historical austerity policies and the European Commission’s rules on debt sustainability. Government debt sustainability appears eminently manageable. Thus, Europe does have room to manoeuvre from a budget and fiscal perspective, while on the geopolitical stage few would argue that its credibility is not clearly on a rapidly improving trajectory.

Contrast this with the US, where debt-to-GDP stands at 125% and rising, and Elon Musk is far from being alone in recognising not only the scale of the difficulties the US now faces, but also that their origins are largely traceable to the country’s weak fiscal position. Funding costs of course are around 5% in the US, and it’s trivial to demonstrate that the overall position as it stands isn’t sustainable. The adjustment is likely to be painful, and not good for growth or local asset markets. We have many empirical analogues for that in Europe in the previous cycle.

Most importantly, the structural reforms of the previous cycle we have written extensively about previously, engendered by the Eurozone crisis and low growth era that followed, have started to bear fruit. Add to this the less hawkish approach to fiscal spending and the more hard-nosed approach to the geo-political tides that are swirling, and the prospects for a business cycle which delivers strong profit growth for small and mid-sized European companies are very good.

The differences between the situations in which the US and Europe find themselves economically and fiscally are clear, and in some ways contrariwise to the prior cycle. But what does it all ultimately mean for markets and, in particular, for quality-growth as a style? In the last cycle, the US trounced Europe on fundamental earnings growth, which in turn fed into much higher valuations and far superior returns. This cycle is likely to be very different.

Are you buying “past” growth?

We discussed above the industry dynamic, based on prior performance, which has led to such a bifurcation of assets within European equities to the extreme ends of the value-growth spectrum. We will now explore those areas in more depth.

Much of the US’s previous outperformance of Europe can be attributed to the sector mix found in both markets. The boom in “big tech” provided a powerful tailwind for the US market’s aggregate performance, but whether large US tech stocks can generate returns on anything like the scale they have previously is much more questionable. This relatively bearish view on the tech sector is based on a series of observations:

·         They are simply larger companies now, and their scope to grow earnings, margins and market share is not what it once was.

·         Their own investments – funded from swollen balance sheets – in both R&D and acquisitions are, in the vast majority of cases, unlikely to generate a return on investment at the level originally envisaged. There are several hundred years of similar examples of overinvestment in new technology. Often the technology is transformational, but the companies that overinvest at high prices suffer.

·         Rapid technological shifts and advancements in artificial intelligence are more likely to help smaller players to challenge the dominance of the large incumbents.

·         Having largely missed out to the overwhelming dominance of US big tech in the last cycle, governments in every other region of the world are keenly aware of the imperative to boost the competitiveness of their tech sectors in the next cycle and beyond.

In this environment, I question the wisdom of having significant exposure to the key themes that benefited from the last cycle, and yet many assets within European equities are still managed essentially according to growth strategies, whether quality-growth (think, sizable exposure to the likes of Nestlé, Unilever, Diageo), or high-growth (here, typical exposures include businesses such as ASML, Novo Nordisk or LVMH).

Most holders of the large mutual funds in this universe recognise that they have sizable exposure to such businesses, and yet in an environment of higher real interest rates (such as the one in which we now find ourselves), I find any argument that the previous “Goldilocks” period – which was so well suited to that type of long-duration equity investing – can persist distinctly unpersuasive. It is very clear to me that this cycle will be very different for markets in general, and for European ones in particular.

Is value the answer?

With the types of growth stocks that are held in significant weightings in many large European equity mutual funds having already enjoyed sizable capital returns, the next option investors may be considering is a greater allocation to “deep value.”

This would arguably appear logical, on the surface at least, but with inflation running higher, and given a generally more supportive outlook for Europe, I would urge investors to be mindful of the extent of the re-rating that has already occurred among these types of businesses.

Those who held such exposure to businesses such as banks have of course enjoyed the returns associated with the re-rating, but fundamentals are already at or near peak. Banks, for example, benefited from the rise in interest rates, which typically translates into improved net interest margins. Furthermore, even if it were fundamentally possible for returns to improve much from here (which it isn’t, as the economy just can’t support that), it is even more difficult to envisage it happening without a political backlash.

While inflation – and therefore interest rates – may remain more elevated than in the previous cycle, it is perfectly conceivable that the next move in rates could be downwards, which would almost certainly prove negative for banks’ net interest margins, and therefore for their earnings. By buying into, or continuing to own European bank stocks, investors many not be buying or owning the most expensive assets on an absolute basis, but they are certainly buying or owning assets that are expensively priced relative to their own history, and where profits are as high as they have been for a long time.

A business-cycle approach for phase two

From a top-down perspective, Europe certainly looks interesting at present, and it is in my view absolutely logical that investors would wish to increase their allocations. But if neither growth- nor value-oriented strategies look especially attractive for European equity investors at this point in the recovery, then an alternative is an approach that acknowledges that different types of company will prosper at different points in the economic and market cycle. This has always been our approach, which we call “business-cycle” investing.

Business-cycle investing – the ability to be agile – means having a mandate that allows portfolio managers to navigate to the areas of the market that are interesting and attractive, something that is beyond the ability of those strategies and mutual funds that have a permanent style bias.

Within Goodhart’s European equity strategy, this means identifying idiosyncratic opportunities, many of which are currently sitting in the “reasonable” valuation range of 12-18x earnings. Such stocks fit neatly into neither “value” nor “growth” buckets, and so have the potential to be overlooked by both of those groups of investors.

Despite this, we are finding this middle territory to be fertile hunting ground for stock ideas with the potential to benefit either from sustainable earnings growth and/or positive change, whether exogenous within the operating environment, and/or within the business itself – with typical examples being a management change or a new product development. In many cases, the market has been slow to reward these changes, their significance for a company’s financial prospects notwithstanding.

Notable examples of stocks we have identified in this “middle ground” include the Italian metal manufacturing industry supplier Danieli, about which I have written previously, and the Swiss electronics manufacturer Cicor Technologies. Both Danieli and Cicor have the potential to be beneficiaries of the evolution of the “four forces” – demographics, security, environment and technology – which we, (and our colleagues at Goodhart), see as shaping the world.

Case study: Danieli

Danieli, which manufactures blast furnaces, is benefiting not only from internal change, but also from developments in the demographic, security and environmental factors.

The family-owned company is one of a very small number of participants in a market with significant barriers to entry. It is a natural beneficiary of global demand for steel so, for example, although the European automotive sector may not appear to be the most exciting area of the global stock market, the rapid expansion of the Chinese auto sector into Europe has boosted demand for European steel, and therefore for Danieli’s core products.

Geopolitical tensions – and contingent increases in spending on military hardware – similarly have the potential to act as a powerful tailwind for Danieli (as the following example shows), as do fiscal stimulus and ongoing urbanisation and construction trends.

Danieli is also a relatively rare example of a heavy industrial company with the potential to benefit from more stringent environmental policies; it is one of only a handful of manufacturers of electric arc furnaces, which are one of the primary means of producing low-carbon “green” steel.

Case study: Cicor

Cicor is a Swiss manufacturer of printed circuit boards (PCBs), operating in a highly fragmented European marketplace with approximately 1,700 participants, and which is ripe for consolidation. Five years ago, Cicor was the 34th largest player in the market, but a successful roll-up strategy (somewhat resembling the approach a private equity consolidator might take) saw it grow to become the 17th largest European player by 2023.

We met the company in Zurich in March 2025 and felt its shares were the wrong price given both its quality and runway of growth. Interestingly, we were one of few investors who met the management at the conference, and they told us it was unusual for them to hold an investor meeting in English. After completing due diligence, we took a position based on our expectations for 5-7% organic growth supplemented by bolt-on M&A, margin expansion as the company reached scale, and a slightly ludicrous 10x 2-year forward P/E multiple, despite having nearly a third of its business exposed to military spending.

In this highly commoditised market, the company has been able to maintain attractive margins by focusing on three core market segments, namely medical, industrial and military. These customer sectors are characterised by an extremely high cost of failure, and as such attach significant importance to reliability. The company’s strong focus on quality control has thus enabled it to maintain meaningful pricing power and, therefore, operating margins. Nevertheless, Cicor’s focus on niche sectors may have led to the stock being overlooked by the majority of European equity investors.

Key segments:

Outlook:

Since we bought the company, it has completed three acquisitions which mean profits are 50% higher than the initial consensus estimates. It has also justifiably started to re-rate, which has led the share price to double. We think expectations are still too low and the company can continue to compound profit growth.

It’s time to think differently

In many respects, the pattern we witnessed in the first half of 2025 is quite unremarkable; it is perfectly common in stock market cycles for rallies to be led initially by a “dash for trash,” before market participants have the opportunity to consider the detail. Thereafter, it is an equally normal phenomenon for attention to turn to smaller businesses and the market to broaden – with the opportunity to compound returns. This, in our view, is where the most exciting opportunities for European equity investors now lie.

A key decision asset allocators now face is whether to continue increasing their exposure to Europe. If US exceptionalism is going to reassert itself, the conclusion is not whether to continue to hold value or growth exposure in Europe, but nor is it even to buy the types of stocks I have highlighted above as being potentially attractive. Rather, the obvious conclusion in that scenario would be to sell Europe, remain underweight, or even to move further underweight.

But if my thesis about the relative attractiveness of European fundamentals is correct, then allocations to Europe will continue to increase. Will this continue to flow almost exclusively to the large cap value-growth extremities of the market?

I suspect this is unlikely, given the starting position and easily recognisable investment opportunity we have discussed.  The market is giving us a clear chance to identify and invest in those overlooked gems with the potential to compound returns in the second phase of this long-overdue European Renaissance. We believe our strategy, our approach and our rich internal and external network within European equities is well placed to help investors exploit this opportunity.

About Goodhart Partners LLP’s European equities capability

Goodhart Partners LLP has a single, 10-person global equities team, within which resides substantial experience of managing dedicated European equity portfolios. A key strength of our business model is that we have been able to attract talented professionals from diverse investment backgrounds. With careful alignment of interests, our culture, structure and approach mean that we are particularly well placed to manage portfolios through economic and market cycles. We believe that the capacity to bring different skill sets and expertise to bear in different scenarios and under different conditions will be especially important and beneficial in the environment of shorter cycles that we expect to characterise the coming decades. We refer to the associated ability and willingness to be both flexible and focused as “agile investing.”

Our core European equities expertise can be summarised as follows:

James Sym – over 14 years as a dedicated European equities portfolio manager with a distinctive, contrarian, business-cycle approach. Previously managed approximately £2.5 billion as head of the Schroder European Alpha Strategies, before becoming Head of Equities at River Global. James tends to have a value-orientation, but this is captured across a multitude of different relative and absolute valuation approaches rather than a simply low current valuation multiples. Exploiting market inefficiencies by meeting companies with promising metrics is an important part of the process. Career experience: 18 years.

Russell Champion – previously a portfolio manager on the award-winning Premier Miton European Opportunities Fund. Prior to this he was a Partner and Team Leader of Redwheel’s European equity team. He began his career at Fidelity in 2005 before moving to Pensato Capital, where he was a Partner and Portfolio Manager. Pensato was acquired by Redwheel in 2017. Russell’s investment process focuses on developing a deep understanding of the long-term operating prospects for businesses, seeking companies with the potential to scale significantly and disrupt. Career experience: 20 years

Neil Wilkinson – Neil joined Goodhart in 2023 as the lead manager for the European Discovery strategy. He started his career in 1996 as an analyst at Cazenove & Co. Since then he has worked as an equity portfolio manager, primarily covering the European small cap market, at AIGGIC, Hermes Fund Managers and RLAM. More recently he was a partner an award-winning London based alternative asset manager with a focus on Pan European small and mid-cap equities. Neil principally invests in companies that can demonstrate predictable revenue streams and stable/consistent margins.  A quality/value investment style underpins his approach which is based on in-depth fundamental analysis and active management. Career experience: 29 years

Richard Tennant – Richard joined Goodhart in July 2025 after a distinguished career as an analyst and European equity portfolio manager at Capital Group (joining in 2018) and, prior to that, Fidelity Investments (joining in 2005), specialising in small caps. At Fidelity, he was mentored by Anthony Bolton. The singular focus of Richard’s investment approach is to identify the next generation of what he refers to as “multi-baggers.” Over the past 15 years, Richard has built a differentiated investment framework grounded in deep quantitative and qualitative research. This includes a global study of every company that has delivered a 5–10x return over a 5-10-year period since the 1920s, paired with over 400 real world case studies and shared lessons from many of the best investors he has worked alongside. Career experience: 20 years

Andrew Heap – Andrew joined Goodhart in January 2025. Before joining Goodhart, Andrew was an analyst at Pie Funds where he worked in the Global equities team from early 2022. Prior to that he worked as an analyst at Redwheel in the European equity team from mid-2017 alongside Russell Champion, and as an analyst at Berenberg from September 2014. Career experience: 11 years

We welcome opportunities to engage with existing and prospective clients who are considering their European equity allocations. For further information, or to discuss your specific requirements, please contact Gary Tuffield, Partner: gtuffield@goodhartpartners.com