European large caps: A cost-effective way to access global growth trends

For many investors, Europe remains associated with sluggish economic growth, heavy regulation, high political risks and years of market underperformance. At the same time, the increasing concentration of global equity markets into a relatively small group of US technology and Artificial Intelligence (AI)-related stocks has heightened interest in diversification.

What strikes me is that many investors still view Europe through a macroeconomic lens. Yet when I look at the European large-cap universe today, I see something quite different. I see global businesses, operating across international markets, often trading at attractive valuations despite possessing leading positions in their industries.

Looking at listed Europe rather than ‘macro’ Europe

For much of the past two decades, European equity markets and the European economy have broadly moved together. Today, that relationship has weakened considerably. Many of Europe’s largest listed companies generate the majority of their revenues outside the region, outweighing domestic dependence. European large cap equity returns have significantly outpaced European economic growth over the past decade and a half (Exhibit 1).

Exhibit 1: Listed Europe has become disconnected from the underlying economy

Source: Bloomberg, Eurostat, Janus Henderson Investors Analysis, as at 31 July 2026.
Note: MSCI Europe EUR Net Total Return Index and European Union Gross Domestic Product (GDP) rebased to 100 on 1 January 2010. From 2026, European Union GDP is an estimate using European Central Bank projections. Past performance does not predict future returns.

This evolution did not happen by accident. Over the past 15 to 20 years, European companies have navigated a remarkable sequence of challenges: from the global financial crisis and subsequent eurozone crisis, to COVID, tariffs and the wars in Ukraine and the Middle East (with their related supply chain and energy shocks). Uncertainty has been so persistent that it has become the new certainty.

Businesses have been forced to learn how to operate in this new paradigm, and some companies that failed to adapt have disappeared. Those large cap businesses that survived have often emerged stronger, becoming more disciplined with capital, and more efficient in their operations. The outcome is that the opportunity set in European large caps has evolved.

Scarcity is now a defining investment theme

We increasingly live in a world where access to capital, scarce resources, energy and strategic infrastructure matters. Electrification, energy, artificial intelligence (AI) and the energy transition are pushing demand, yet supply remains constrained. Conflict in the Middle East has restricted shipping through the Strait of Hormuz and the Bab al-Mandab Strait, while Ukraine’s strategy has shifted to targeting the energy supplies that fund the Russian economy and its war efforts.

The global significance of these supply restrictions has reinforced the importance of energy security. Both price and supply reliability are equally critical. We see a range of world-class businesses in Europe that can play an important role in building out the world’s energy infrastructure. This is not limited to just mining companies, but also businesses providing equipment, technologies and services that support production.

Another area in which we continue to see opportunities is financials. The backdrop has improved meaningfully for European banks after a long process of repairing their balance sheets. Interest rates have normalised, moving away from the ‘near zero’ rate environment that constrained profitability for many years. The short end of the yield curve now hovers around a ‘sweet spot’ between two and four per cent. We see this as a much more supportive environment for European financial stocks than we have seen for some time.

The opportunity in financials extends beyond traditional banking. In our view, financial services businesses, capital market operators and wealth management firms also seem well placed as potential beneficiaries.

Europe’s biggest challenge is capital

One reason Europe continues to trade at a discount in the eyes of many international investors is its difficulty in converting innovation into scale.

Europe does not have a talent problem. Strong education systems, skilled workforces and meaningful support for innovative start-ups are a good foundation. The challenge comes later. When a company needs to raise larger-scale investment to accelerate growth, it often runs into a glass ceiling.

Part of the problem is regulation. Europe has spent years positioning itself as the global benchmark for regulation. While motivated by good intention, too often the result has been to make growth and expansion more difficult.

The bigger issue, however, in our view, is capital. Much of Europe remains heavily dependent on bank lending, while many countries lack large pools of private pension capital deployed in the market. Similarly, banks faced increased capital requirements, which caused lending to be selective, favouring parts of the economy they perceive as lower risk. The outcome is that Europe’s innovative smaller companies can struggle to access the capital they need to fund their development.

The challenge for Europe, in our view, is to address these operational barriers to innovation, while acting to deepen capital markets (along with incentives for banks to finance a wider range of businesses). If the bloc can address these obstacles, it opens the door to unlocking its full potential.

In the meantime, entry price remains one of the most compelling arguments for an allocation. While consensus forecasts point to accelerating earnings growth[1], European equities continue to trade at substantial discounts to their global peers[2] (Exhibit 2).

Exhibit 2: European equities at multi-decade valuation lows

Source: Bloomberg consensus forecasts, Janus Henderson Investors Analysis, 1 January 2000 to 31 August 2026. The discount indicates European equities are cheaper relative to global equities, in terms of P/E valuation. There is no guarantee that past trends will continue, or forecasts will be realised. 

Can Europe still catch up in the field of artificial intelligence?

While a highly pertinent topic, we think this question is not necessarily the right one for investors to focus on. When people talk about AI, they often focus on who will build the leading models in China or the US. I think the more interesting question is where value will be created as AI becomes increasingly commoditised.

Right now, we see the cost of tokens (the basic unit of data that an AI model uses) falling and, for many applications, older models can often deliver effective results without high costs. This seems supportive for companies that already have strong products, established customer relationships and leading market positions.

The potential of AI seems huge, but the real opportunity for us is identifying the companies that can use AI to make already strong products even better. This applies to companies that are embedding AI into their workflows, engineering processes, manufacturing systems and enterprise software being used by customers around the world.

Alpha through transformation

Europe faces real challenges, from regulation and fragmented capital markets to a shortage of patient capital. Yet beneath those challenges sits a universe of resilient global businesses with international exposure and attractive valuations. We continue to see opportunities in stronger financial institutions, businesses linked to scarce resources and energy security, and companies already utilising AI to solve specific real-world problems and automate tasks.

As always, active stock selection matters, with discipline in both buying and selling. The challenge is identifying where long-term change is being underestimated by the market. In our view, the opportunity is not to see Europe as a single investment idea, but to identify the companies that can potentially benefit from the major changes currently underway.

[1] Source: Bloomberg, consensus forecasts, as at 31 August 2026. Past performance does not predict future returns.
[2] Source: MSCI Europe Index relative to MSIC AC World Index. Forward price/earnings ratio (forward PE), as at 31 August 2026.