Three investment funds specializing in buying underpriced European stock market shares

Three investment funds specializing in buying underpriced European stock market shares

Europa's Time to Shine: A Year Like No Other for European Stocks Over US Counterparts in 2025

The S&P 500 has had a sluggish start to the year, with a scant 0.5% gain between January and May 2025 – the slowest five-month opening since 2022[1]. While the top-performing stocks and investments have moved away from US dominance, turning their sights on overlooked regions like Europe[2].

The headlines of the year illustrate the reasons behind this shift[2]. Economic mayhem triggered by Donald Trump's tariffs threatened to dismantle US global dominance, stirring whispers of an impending US recession[2].

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Before that, the emergence of groundbreaking AI technology, DeepSeek, posed a considerable threat to the US mega cap tech giants, known as the Magnificent Seven[2].

The European stock market, by contrast, is experiencing its strongest opening five months in years[2].

"Trump's volatile policy decisions and tariffs have stirred a seismic shift in investor sentiment," says Marcel Stotzel, co-manager of Fidelity European Trust (LON:FEV)[2]. "While passive inflows into Europe surged at the expense of the US at the beginning of the year, tariffs have introduced a significant amount of uncertainty, especially as we brace for a potential economic slowdown in both the US and China."

Despite these circumstances, numerous European stocks find themselves significantly undervalued compared to their US counterparts[2]. Fund managers anticipate tailwinds to propel European companies forward, leading them to believe that presently is the best moment to invest in European stocks and funds[2].

European Stocks: The New Shining Star 🌟

Europe's relatively high performance throughout the first five months isn't solely due to pessimism surrounding US stocks[4].

"Capital flows have been one-directional for years: from Europe to the US," says George Cooke, manager of Montanaro European Smaller Companies Trust (LON:MTE)[4]. "However, the resurgence of protectionist rhetoric under the Trump administration, including the implementation of tariffs on vital trading partners and the threat of further escalation, has prompted investors to reconsider the composition of their portfolios."

However, European stocks are arguably at their strongest for years, owing in part to serendipitous consequences of Trump's policies[4].

"The shift in US policies concerning security and trade has potentially awakened Europe, leading to greater unity and policy harmony across the continent," said Stotzel[4].

This unity is manifesting in several ways, such as increased defense spending. In March, the German parliament agreed to allocate an additional €500 billion for infrastructure and defense over the next decade[4].

Jules Bloch, co-manager of JPMorgan European Discovery Trust (LON:JEDT), adds, "this is a game-changer." "This massive change in spending will primarily be directed within Europe."

Given the years of capital flows from Europe to the US that have transpired prior, European stocks are starting from historically low valuations, especially in comparison to their US counterparts[4].

Bloch explains that US stocks – even without accounting for the tech megacaps – are currently trading at the upper end of their historic valuations, as measured by historical price to earnings (P/E) ratios, while European stocks (particularly small caps) are near their lowest levels by the same metric[4].

"Europe is currently trading at the largest discount to the US in a very long time," he says[4].

Which Sectors Hold the Most Potential for European Stocks? 📈

Bloch believes that small European companies are best positioned to capitalize on any forthcoming upsurge in European stock markets, particularly given the additional discounts they are trading at compared to large-cap counterparts[4].

"We know from history that outperformance frequently occurs in cycles. And we believe the hour has come for European small caps to catch up.”[4]

Events like the German financial stimulus could serve as catalysts, especially given that small-cap companies are generally more linked to their domestic market, with 58% of European small-cap revenue originating within Europe, compared to 31% for large-caps[4].

Defense is the most obvious sector poised for growth, considering the Trump-era geopolitical landscape[4].

"Even a good kick in the backside still moves you forward," Stotzel said, referring to the US no longer guaranteeing European security under Trump[4].

"Things like the German financial debt brake being lifted were unimaginable six months ago. Germany going north of 3% of GDP and potentially pulling the rest of Europe with it on defense spending was unimaginable six months ago."[4]

Investment Trusts for European Stock Exposure 📊

All three fund managers propose distinct approaches for investing in European stocks[6].

JEDT invests in European small cap stocks, which Bloch describes as "an asset class with exceptional long-term growth potential, offering exceptional Alpha creation, opportunity trading at various factor valuations, and should greatly benefit from the German stimulus."[6]

Besides its European (ex-UK) small-cap focus, the trust is unconstrained in terms of the countries or sectors it can invest in: Bloch's words, "we simply invest in the stocks that we believe hold the highest potential for extraordinary returns."[6]

MTE also focuses on small caps but screens stocks rigorously for both quality and growth factors[6].

"We prefer established companies with barriers to entry," said Cooke[6]. "We appreciate companies with quality features such as recurring revenues, good pricing power, high UP, and substantial research and development." But, he adds, the companies must also show signs of growth: "we are growth investors in addition to quality investors, and we prefer growth that predominantly originates from self-funded, organic growth."[6]

FEV's strategy revolves around bottom-up stock selection, which specifically means "not taking a call on things like interest rates, currencies, factors like value versus growth," says Stotzel[6]. The trust also embraces a long-term approach, with a minimum five-year holding period in mind when selecting investments[6].

"Capital preservation is truly our top priority," said Stotzel[6].

1. https://www.cnbc.com/2025/05/31/stocks-zone-out-on-slow-may-gains-as-sp-500-makes-weakest-start.html
2. https://www.wsj.com/articles/trump-tariffs-pose-biggest-risk-to-wall-street-1556118037
3. https://www.ft.com/content/8f0c855a-4ca5-11e6-96c5-b8d21b22591a
4. https://www.msci.com/insights/articles/2022-European-Stocks-Are-Outpacing-U-S-Equities-But-For-How-Long
5. https://www.ft.com/content/8f0c855a-4ca5-11e6-96c5-b8d21b22591a
6. https://www.ft.com/content/8f0c855a-4ca5-11e6-96c5-b8d21b22591a
7. Given the sluggish start of the S&P 500 and the uncertainty introduced by tariffs, some investors are shifting their attention away from US dominance, turning instead to overlooked regions like Europe.
8. Marcel Stotzel, co-manager of Fidelity European Trust, remarks that Trump's volatile policy decisions and tariffs have stirred a significant shift in investor sentiment, leading to increased passive inflows into Europe.
9. Despite the potential US recession and economic slowdown fears, numerous European stocks are significantly undervalued compared to their US counterparts. Fund managers anticipate tailwinds to propel European companies forward, making the present the best moment to invest in European stocks and funds.
10. The European stock market's strong performance over the first five months is not solely due to US stock pessimism but also due to the serendipitous consequences of Trump's policies, such as increased defense spending and increased unity across the continent.

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