Europe is undergoing a fiscal and regulatory reset aimed at shoring up its defenses, reinforcing economic stability and boosting long-term competitiveness by embracing innovation. The region’s vulnerabilities were exposed by Russia’s invasion of Ukraine – and, before that, by the Covid pandemic. The need to accelerate the green and digital transitions is also stimulating profound change. Europe’s growth has long been disappointing.
This could be now changing. One of Europe’s goals is to establish itself as a global innovation hub by leveraging its leadership in clean energy and advanced manufacturing. Instruments such as the Innovation Fund, Horizon Europe and Invest EU support channelling capital into critical technologies. The result may be that after many years of excessive German fiscal caution a major revitalization is taking place which could raise its previously tepid growth rate. These efforts at revitalization in Europe coincide with a marked rise in economic uncertainty in the U.S., where trade and growth rates may decline. By contrast, Europe’s attractiveness as an investment location is increasing, under-pinned by initiatives such as the Saving and Investment Union that should deepen the region’s capital markets. There are potential opportunities for international investors to deploy new growth strategies across multiple asset classes.
Equities: Repricing the European economy
One of the most notable highlights of equity markets so far this year has been one of the best performances of the Dax relative to the S&P500 since the 1960s. As of August 25, the Dax has gained over 20% in euro terms (around 37% in dollar terms), while the S&P 500 is up around 10% measured in dollar year-to-date. However, the latter translates into a slight loss when translated in euro, as a result of the weak dollar. This European outperformance versus the US has come to a halt in the second quarter for three main reasons we believe:
The ongoing AI strength and less damage from the US tariff announcements have helped US equities rebound after a very weak first quarter.
Currency headwinds for European companies.
Central bank policy expectations have changed. We expect the US Federal Reserve (Fed) to have significantly more leeway to cut rates than Europe leading to five cuts (each 25 basis points, bps) for the former and just one cut for the latter in the coming four quarters.
Fixed income & currencies: Attractive yields and the dollar perspective
Alongside US Treasuries, the European bond market – particularly German government bonds – has long been regarded as a potential safe haven in turbulent times. Thanks to currently attractive yields, a steeper yield curve, and the prospect of a further interest rate cut by the ECB, we believe that German government bonds are currently particularly appealing, especially compared with U.S. government bonds. Although the relaxation of budget rules in Germany led to a sharp, temporary rise in Bund yields at the beginning of the year, the higher debt burden in the US, and the potentially greater negative impact of US tariff policy on growth and inflation in comparison with Europe, could ultimately favour continued diversification away from US government bonds and towards German government bonds.
Multi-asset: Europe as a diversification anchor
The increased focus on European capital markets has been prominent for a while now. For several months now, global investors have been reallocating their funds from US equities and fixed-income securities to European assets. Data on inflows into European exchange-traded funds (ETFs) confirms this picture. According to the latest Morningstar data, investors have continued displaying caution to both U.S. equity and bond markets. US large-blend equity ETFs saw outflows of ca. €3bn in the second quarter 2025, while European and Eurozone equity ETFs have attracted almost €8bn inflows in the same period. Overall, investors do not demonstrate a complete aversion to the US, but we do see attempts at more regional diversification where European markets are clearly capitalizing on this. Finally, within the DWS long-term capital markets assumptions framework (DWS Long View), our return expectations on a ten-year forward-looking basis for European equities remain attractive compared to their US counterparts. In local currency terms, we expect an annualized return of 6.2% for Europe and 5.9% for the S&P 500 index.
Real estate: The “pinch hitter” opportunity
European real estate is undergoing a notable resurgence, drawing increasing interest from global investors. The region’s property market is emerging as a strategic “pinch hitter”—a term borrowed from baseball to describe a substitute player brought in at a critical moment. In this context, Europe appears to be stepping up underpinned by improving liquidity, supportive fiscal policy, and persistent supply constraints.
Urban resilience is a defining feature of this recovery. Gateway cities such as Berlin, Amsterdam, and Paris are outperforming national averages, driven by strong occupier fundamentals and demographic vitality. These cities are projected to see an 8% increase in their working-age populations over the next decade, while the broader European landscape faces a 3% decline. This urban dynamism is attracting talent, businesses, and capital, reinforcing the appeal of real estate investments in these locations. The resilience of these cities is further evidenced by robust rental growth, low vacancy rates, and a healthy demand for high-quality space.
Infrastructure: The fiscal engine of transformation
Infrastructure will also be at the heart of Europe’s renewal, with the clean energy and digital infrastructure sectors being some of the key beneficiaries of both fiscal expansionism and an uptick in private sector interest. As it stands, the European infrastructure market is the largest and most developed globally, with transaction opportunities spanning across every sector. Underpinned by stable and long-term regulation, the market has long attracted international capital looking to benefit from defensive, uncorrelated returns in their portfolios. However, the combination of the growth of large, globally focused infrastructure funds in recent years, and of the US infrastructure market’s attractiveness on the back of the Inflation Reduction Act, has seen Europe cede market share to North America. Compounding this, while European infrastructure may be structurally attractive, the economies that it serves have been lagging from a growth perspective relative to more dynamic markets like the US and those in Asia.
Private credit: An alternative financing vehicle
The European market is currently facing a unique set of economic and geopolitical challenges, including increased fiscal spending needs, regulatory changes, and the need for enhanced defense capabilities. Private credit steps in to fill the gaps left by traditional banking systems, which are constrained by higher capital requirements and regulatory pressures. One of the primary ways private credit helps the European economy is by providing alternative financing solutions to small- and medium-sized enterprises (SMEs). With the new Basel III regulations increasingly imposing additional capital requirements on bank lending, there is a growing need to combine bank lending with private and public capital markets to finance expansion. Private credit firms offer bespoke, highly structured financing solutions that are not viable for bank balance sheets due to regulatory charges. This allows SMEs to access the necessary funds to grow and innovate, thereby strengthening the overall economy.
Commodities: Strategic realignment
Europe has a clear mission in terms of decarbonization, the deployment of renewables and diversification away from Russian gas. Since 1990, European greenhouse gas emissions have declined by 37% despite a 68% increase in the region’s GDP over the same period. This success has been achieved in part by the rapid deployment of renewables which now account for over 45% of total power generation. This trend will continue. According to the IEA, Europe is committed to continue to invest in renewable energy, spending over $400bn each year between 2026 and 2030. This has also facilitated Europe’s efforts to reduce its heavy reliance on Russian gas under the REPowerEU initiative. Alongside increased liquid natural gas (LNG) exports, most notably from the US, this has led to the share of European natural gas imports from Russia falling to just over 10% in the second quarter of this year compared to nearly 50% prior to the Russia-Ukraine war.
