Europe funds review – what does improving European growth mean for markets?

This has prompted some investors to take a closer look at the region, particularly as share price valuations in parts of Europe continue to offer value compared with other major markets.

This article isn’t personal advice. If you’re not sure an investment is right for you, ask for financial advice. Investments can fall as well as rise in value, so you could get back less than you invest.

Europe growth outlook improves

European Central Bank (ECB) President Christine Lagarde has suggested the bank is likely to upgrade its growth forecasts for the region again at its December meeting. This would follow September’s revision, when the ECB raised its 2025 GDP (a measure of economic growth) projection from 0.9% in June to 1.2% – the first upward revision in more than a year.

The Eurozone grew 0.2% in the third quarter (July to September), exceeding expectations and despite concerns about trade tensions and a challenging global backdrop. Investment in areas like digital services helped underpin activity and means the economy has held up better than some feared when the year began.

Inflation has also moved slightly higher, reaching 2.2% in November and sitting above the ECB’s 2% target for the third month in a row. Combined with stronger growth, this has led investors to increase expectations of a potential interest rate rise in 2026.

Quality takes a back seat

In markets, there’s been a clear shift in investment style leadership. Quality investing, which focuses on companies with strong balance sheets, dependable cash flows and sustainable competitive advantages, fell firmly out of favour in 2025, though still grew in value.

Europe’s benchmark of quality companies is 23 percentage points behind value since the start of the year to the end of November 2025.

Several factors have driven this rotation.

Cyclical (more economically sensitive) sectors like banks and aerospace and defence have surged, supported by stronger demand and heightened geopolitical tensions. Sectors often associated with quality, like healthcare, consumer staples and telecoms, have struggled to keep up.

Investment styles move in and out of favour though, and historically quality companies have shown resilience over full market cycles, particularly during tougher times. For patient, long-term investors, the current environment might offer opportunities, with many strong European businesses trading at more attractive valuations after a challenging period.

How have European stock markets performed?

Since the start of 2025 to the end of November, the broader European stock market, as measured by the MSCI Europe ex UK index, grew 24.21%*. This makes it one of the world's best performing markets over this time. As always, past performance isn’t a guide to future returns.

Southern European markets have led performance over the year so far, after previously being shunned by investors following the peak of the Eurozone debt crisis in 2012. Greece has led the way with returns of 71.01%, while Spain and Italy have grown 61.95% and 42.19%, respectively.

Europe attracted investor attention this year after Germany announced a fiscal stimulus package and defence spending increased significantly across the continent. This helped markets like Germany’s, which has risen 24.14% over the same time. But many investors have turned to overlooked markets in southern Europe that offer greater value.

Stronger economic growth and improved political stability in the southern region has also helped. As has the performance of banking shares, which make up a much greater portion of these countries’ markets.

The financials sector makes up half of Italy’s main market, and because of the strength of Greece’s banks, the sector now makes up almost three quarters of the Greek market compared with 44% three months ago.

Returns in northern Europe have been more muted. It’s been a noticeably painful time for Denmark, whose stock market has lost 21.79% over the calendar year to the end of November. This has a lot to do with pharmaceutical giant Novo Nordisk’s share price falling dramatically due to downgraded growth forecasts, disappointing clinical trial outcomes, and rising competition from US firm Eli Lilly.

European smaller companies returned to form over the year, growing 24.32%. When investor sentiment improves it can benefit higher-risk smaller companies that rely more on the strength of their domestic economies for success. This has helped performance in recent months.

European stock market performance in 2025

Past performance isn’t a guide to future returns.

Source: *Lipper IM, to 30/11/2025.

How have European Wealth Shortlist funds performed?

The European Wealth Shortlist funds have delivered different returns over the past year. We expect this – a range of managers with different strengths, styles and areas of focus will perform differently in different economic conditions.

Remember, past performance isn’t a guide to the future, and performance here is over a short time. All investments fall as well as rise in value, so you could get back less than you invest. Income is variable and not guaranteed.

Investing in funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest and make sure any new investment forms part of a diversified portfolio.

The Legal & General European Index fund was the best-performing Wealth Shortlist fund over the year so far. The fund grew 23.76% compared with 19.66% for the average fund in the IA Europe excluding UK sector.

The fund offers broad exposure to larger European companies, excluding the UK. It aims to track the performance of the broader European stock market, as measured by the FTSE World Europe ex UK Index.

The fund has benefited from the broader strength of the European stock market and the low costs involved in running the fund. It performed better than the average European fund this year as market returns this year were more concentrated than usual in certain countries and sectors. Many active funds tend to take a more diversified approach.

The benchmark index is currently made up of 546 companies and focused on sectors like financials, industrials and healthcare. France, Germany and Switzerland make up a large part of the index, accounting for 20.4%, 18.7% and 18.0% respectively.

CT European Select was the weakest-performing fund in the European sector of the Wealth Shortlist, though it still grew 8.78%, a respectable return over this time. The fund’s quality-focused investment approach was a headwind, while value and more economically sensitive sectors performed better.

The fund managers continue to concentrate on the fund’s long-standing investment philosophy and process, which is something we like to see. They continue to focus on high-quality companies which offer sustainable returns and strong growth potential over the long run. We expect a focus on quality to provide more stable returns compared with peers when markets are weaker or more volatile.

The managers invest in a relatively concentrated number of companies, meaning each investment could have a big impact on performance, which increases risk.