The momentum building in European markets at the start of the year has been derailed by the war in Iran. Europe has been seen as vulnerable to higher fossil fuel prices. Germany’s industrial companies have been particularly hard-hit, but there have also been knock-on effects for the region’s flagship luxury goods companies.
These areas have undoubtedly been weak. While European markets as a whole are only down 2.2% (as measured by the MSCI Europe ex UK index) to the end of March*, the industry-heavy German Dax index fell 7.5%, while the STOXX Europe Luxury 10 index (which tracks the 10 companies with the highest exposure to European luxury goods) is down 21%**.
The difference between the index and actively-managed investment funds is notable. The average fund in the IA Europe ex UK sector is up 4.4% for the year to date***. It is a reminder that the European stock markets can be a real source of opportunity even if the economic outlook for the region is lacklustre and there are pockets of vulnerability.
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In the short term, the market is distracted by the war in Iran. James Inglis-Jones, manager of the Liontrust European Dynamic fund highlights the polarisation in European markets in March: “Energy was the clear standout beneficiary of the surge in commodity prices, delivering strong gains. In contrast, all other sectors declined, with defensives holding up relatively better – utilities, communication services and materials posting more modest losses. Cyclical areas were hit hardest, as industrials and consumer discretionary sold off sharply, with real estate the worst-performing segment amid rising rate expectations.”
However, this is unlikely to define the long-term winners in European markets. There are plenty of areas of potential growth within Europe. The defence sector, for example, has been a real area of strength as investors have anticipated higher government spending as the US/European partnership fractures. Governments across Europe have committed to raising spending, which has seen steep share price rises in many defence companies. The MSCI Europe Aerospace and Defense index rose 75% in 2025**.
While it has been weaker for the year to date, many active fund managers still have exposure to the sector. For example, the BlackRock European Dynamic fund has a holding in French aerospace company Safran^, which designs, develops and manufactures commercial and military aircraft engines.
Europe is ploughing ahead with the energy transition. The European Commission announced another raft of measures on 22 April to address rising energy costs, reduce dependency on volatile fossil fuel markets and increase cooperation between EU countries. The region is already less dependent on fossil fuels than it was at the time of the last energy shock. Energy diversification and the increased use of renewables led to an 11.1% fall in the EU’s energy imports in 2025 compared with 2024^^.. The European Investment Bank Group recently approved almost €2 billion for initiatives to expand Europe’s clean energy investments.
The two largest holdings in the BlackRock Continental European Income fund are French group TotalEnergies and Engie^. TotalEnergies has built a large renewables business with major renewables projects across the globe, including Chile, Japan and South Africa. The Liontrust fund also holds the company in its portfolio^^^. Engie is a leader in sustainable energy supplies and services, including solar, onshore and offshore wind, and biomethane, plus flexible energy storage options.
Banking has been another significant theme in the region. The two BlackRock funds have significant weights in the banking sector. The Dynamic fund holds companies such as Italian banking giant Unicredit, ABN Amro Bank and Lloyds^. The Income fund holds private banking group Intesa Sanpaolo, and Nordea Bank, among others^. The European banking sector has continued to deliver significant profitability and many fund managers believe there is further to run, particularly if interest rates tick higher in response to the crisis.
The BlackRock European team says, for the time being, “nothing we are seeing in the industrial or consumer economy makes us want to panic buy defensive assets for the sake of hiding… Europe remains home to many world-class franchises, companies owning core technologies that make them the enablers of some of the large transformational changes going on around us.”
While European economies are facing real challenges, the region is home to some great companies, and good active managers can target growing segments. The region may have had a tough time during the recent crisis, but there is still plenty to like.
