In our previous European sector review, we highlighted how rising geopolitical tensions and higher energy prices could impact the inflation outlook. Since then, it has started feeding through into the data.
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What has happened to European inflation?
Annual inflation in the Eurozone rose to 3.2% in May, up from 3.0% in April and the highest level since September 2023. The increase was driven in part by higher energy prices, which were 10.9% higher than a year earlier as disruption to energy markets linked to the conflict in the Middle East continued to push oil and gas prices higher.
The latest figures suggest that inflationary pressures are becoming more widespread though. Services inflation, for instance, rose to 3.5%. This means that the impact of higher energy costs is beginning to spread beyond utility bills and fuel prices.
Inflation has also now exceeded the European Central Bank’s (ECB) 2% target for three consecutive months, raising concerns that rising prices could be here to stay if energy costs remain elevated.
The ECB responded by raising interest rates from 2.00% to 2.25% in June, its first increase since September 2023. The bank now expects inflation to average 3% this year – though it could land higher if oil prices climb – and has lowered its expectations around economic growth. This highlights the difficult position facing policymakers, who must balance the need to contain inflation against the risk of slowing economic activity.
Looking ahead, the outlook for interest rates has become less clear. Investors had largely anticipated the latest rate increase, but it’s not yet clear if this will be a one-off move or there are further rate rises to come. This will partly depend on the direction of energy prices and inflation from here.
As noted in our previous review, Europe remains sensitive to developments in energy markets. For now, the ECB appears to want to keep inflation under control, but what happens to interest rates throughout the year will depend on the data and whether energy prices remain elevated.
How have European stock markets performed?
Over the past year to the end of May 2026, despite the uncertainty caused by conflict in the Middle East, the broader European stock market as measured by the MSCI Europe ex UK index grew 20.04%*. But as always, past performance isn’t a guide to future returns.
This is a great return for investors over a one-year period. But the past year has been anything but normal for markets. Some other global stock markets grew even more because of their greater exposure to higher-growth AI-related companies, which have performed especially well in recent months. That said, the European market has greater exposure to other sectors that can provide important diversification to an investment portfolio, like financial services, industrials and healthcare.
Over the year, there was a significant difference between the ‘growth’ and ‘value’ investment styles. The MSCI Europe ex UK Value index grew 25.15%, and the MSCI Europe ex UK Growth index grew 15.53%.
Traditional value sectors including mining and banks performed strongly over the year. Mining received a boost from higher commodity prices and demand from the energy transition, and banks have benefited from higher interest rates that boost their profits.
The three months to the end of May 2026 saw a reversal in this trend, though, with the mining sector losing value and higher-growth technology businesses taking the lead. The important point here is that elevated performance from any sector is unlikely to continue indefinitely – different sectors and investment styles will come in and out of favour over time, which is why diversification is a must for any investment portfolio.
31/05/2021 To 31/05/2022 | 31/05/2022 To 31/05/2023 | 31/05/2023 To 31/05/2024 | 31/05/2024 To 31/05/2025 | 31/05/2025 To 31/05/2026 | |
|---|---|---|---|---|---|
MSCI Europe ex UK | -1.23 | 8.95 | 17.72 | 7.14 | 20.04 |
MSCI Europe ex UK Growth | -5.99 | 12.24 | 14.63 | -2.06 | 15.53 |
MSCI Europe ex UK Value | 3.91 | 5.04 | 21.93 | 17.69 | 25.15 |
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.
Investing in funds isn't right for everyone. Investors should invest only 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 that any new investment forms part of a diversified portfolio.
For more detail on each fund, its charges and specific risks, please see the links to their factsheets and key investor information below.
The Legal & General European Index fund was the best-performing Wealth Shortlist fund over the year to the end of May 2026 – growing 20.67%*.
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 over the year as market returns were more concentrated than usual in certain countries and sectors, and all passive funds benefited from this.
The fund can lend some of its investments to others in exchange for a fee in a process known as stock lending. This helps to offset some of the costs of running the fund, though it increases risk.
Polar Capital European ex UK Income was the weakest-performing fund in the European sector of the Wealth Shortlist, though it still grew 6.00%*.
The fund’s conservative in the way it’s managed, so we don’t expect it to keep pace with a strong market rise like we saw over the past year – especially one led by more economically sensitive areas of the market like banks and mining, which the fund tends to avoid. More recently, the fund didn’t keep pace with the market in April, when higher-growth tech businesses rebounded.
Positively, the fund provided some shelter when the market fell in March following the breakout of the US/Iran conflict, outperforming both the index and peers.
This is broadly how we’d expect the fund to perform in this environment – it hasn't kept pace with a rapidly rising market, particularly in more economically sensitive sectors. We expect it to perform better when more defensive businesses do well or the broader market stumbles.
The fund has continued to pay an attractive income to investors, as it has done over the long run. It currently yields 3.83%, although income is not guaranteed, and yields aren't a reliable indicator of future income. The fund takes charges from capital, which can help boost the income paid but reduce growth potential.
The fund is concentrated and has the flexibility to use derivatives, both of which can increase risk.
Annual percentage growth
31/05/2021 To 31/05/2022 | 31/05/2022 To 31/05/2023 | 31/05/2023 To 31/05/2024 | 31/05/2024 To 31/05/2025 | 31/05/2025 To 31/05/2026 | |
|---|---|---|---|---|---|
Legal & General European Index (Acc) | -1.66 | 9.34 | 15.85 | 7.55 | 20.67 |
Polar Capital European Ex UK Income (Inc) | 6.47 | 10.12 | 8.58 | 9.58 | 6.00 |
IA European Smaller Companies | -10.51 | -2.28 | 11.43 | 5.98 | 15.60 |