Monday Club – 09/06/25: Your weekly Wealthwise digest

Investment round-up

European equities targeted

Investors continued to snap up European equity funds in May, according to Calastone’s Fund Flow index. The data showed European equities enjoyed their strongest month since June 2024, with net inflows of £369m. Overall, however, confidence was muted.

HSBC AM launches active ETFs

HSBC Asset Management is moving into active exchange-traded funds with the launch of five new quantitative equity strategies. The HSBC Plus active ETF range is aimed at investors seeking country and regional exposures through ‘core’ and ‘income’ versions.

D-Day for Woodford strategies service

Neil Woodford’s platform, W4.0, launched on 6 June. The subscription-based service offers access to investment strategies and ideas created by Woodford, which individuals can use on an existing platform, SIPP, ISA or brokerage account.

Ninety One’s year of two halves

Ninety One saw flows turn positive in the second half of its financial year, reversing significant outflows in the first half. For the year ended 31 March 2025, though, full-year net outflows were still £4.9bn – £5.3bn of outflows in the first half offset by net inflows of £400m in the second half.

Private markets kick on

Private markets are set to experience additional growth, according to BNP Paribas Asset Management’s 2025 Thematics Barometer survey, as investors look to tap into emerging trends and technologies. Allocation to traditional asset classes has remained “relatively consistent”, according to the report.

In focus: Continental health

Investors who have shifted money out of the US and into Europe in recent months are – thus far – likely to be happy with their decision. The MSCI Europe ex UK index has comprehensively outpaced its World counterpart over the year to date while inflows into European equities continue to support further progress.

With inflation coming in under target at 1.9% last week – in turn allowing the ECB to cut interest rates to 2% – Europe continues to have its moment. Nevertheless, some longstanding issues have not simply disappeared – so how can investors best take advantage of the region’s recovery from here?

For the most part, early flows out of the US and into Europe have clearly been directed at passive investments and the index heavyweights. Morningstar data, for example, showed combined inflows into ETFs in the Europe and eurozone equity categories in April at €7.9bn (£6.65bn). ETFs, of course, will often be the first port of call for international asset allocators changing direction.

Defence has also been a major beneficiary of these early flows, with the MSCI Europe Aerospace & Defence sector up 59% over the past 12 months alone. That said, it is looking increasingly highly valued – the forward P/E ratio for the MSCI sector index is almost double that of the wider MSCI Europe benchmark – and some active managers are starting to take money out of the sector.

The arguments in favour of Europe as a whole have been well-rehearsed. As Chelverton European Select fund manager Gareth Rudd says, Europe had tended to be seen as the poor relation while investors were focused on all things AI, but people have increasingly tired of that trade. “What Germany has done by investing nearly €1tn is groundbreaking,” he adds. “The bund market is telling us the country can afford it. It could be an exciting time for Europe.”

For his part, JPMorgan European Discovery Trust co-manager Jules Bloch says: “Growth is now coming back to Europe. People don’t fully grasp what is happening in Germany at the moment. The country is spending €500bn just on infrastructure and defence. That’s the GDP of Austria! It is a huge change.” Marcel Stotzel, co-manager of Fidelity European Trust, agrees, observing: “A kick in the backside still moves you forward.”

The removal of US defence support and forced self-reliance should galvanise Europe into action. Equally, and in spite of the recent rally, Bloch says European stocks continue to trade at very attractive valuations. “There is still a very stretched valuation differential between Europe and the US,” he points out. “It is the largest discount to the US in a very long time. Investors still get a good deal trading in Europe.”

Europe, however, is still Europe. Rudd concedes there are likely to be lots of slips along the way while Stotzel says tariffs remain a major risk for companies across the region and, if the US falls into recession, Europe is unlikely to be immune. “We have tariffs that are pretty punitive and that alone could lead to a recession,” he adds. “There is no lack of short-term storm clouds in Europe – plus some of the old favourites, such as poor demographics, low productivity and high government debt, are still with us.”

Some of Europe’s major companies also face challenges – for example, Novo Nordisk is seeing considerable competition to its wonder drug Ozempic as other businesses look to grab a chunk of the weight-loss market. Dutch tech giant ASML has meanwhile seen around $130bn wiped off its value in under a year because of concerns on China and tariffs. Europe’s dominant luxury goods companies are facing similar problems, as Chinese consumers turn to domestic brands and deglobalisation starts to bite.

The answer for most managers is to turn to more domestic exposure – particularly smaller companies. “In European smallcaps, you get a second discount because they are trading at a discount to large caps that has now widened out to around 30%,” says Bloch. “Smallcap outperformance tends to happen in cycles and this level of discount has historically been a trigger for smallcaps to move ahead.”

Smaller companies should also benefit from lower interest rates. The rate cut last week is the eighth by the ECB in under a year – and interest rate cuts tend to work with long and variable lags. The rate cuts to date do not appear to have had any real impact on sentiment yet and have done little to narrow the discount with larger companies.

For the first time in a long while, though, the more domestic focus of European smallcaps appears to be an advantage as the stimulus packages from Germany and elsewhere are likely to be spent within the continent.

“Some 58% of revenues from European smallcaps are generated inside Europe,” notes Bloch. “For large-cap, the figure is only 31%. European smallcaps are more geared to the European economy. The companies that will benefit most from the stimulus will be the local European smaller companies.”

Stotzel has been adding to the Fidelity fund’s domestic exposure. Rudd also has a domestic focus, explaining: “Large companies in Europe have a much lower exposure to Europe and they have been rewarded for being global.” He believes companies will now be thinking harder about their supply chains, potentially reorientating them to more domestic producers. It is a phenomenon widely discussed in the context of the US, but less widely considered in Europe.

“You do not need a massive repatriation of capital in order to have an enormous effect on European markets,” Rudd concludes. “While we can paint a pretty good picture, though, we are not complacent. We like companies to have net cash on the balance sheet so that, even if they do have slips, they will be able to navigate them.”

Europe looks more interesting than it has for some considerable time but real risks do remain in certain parts of the European market – particularly among some of the larger companies. Smaller businesses seem likely to be a more fertile hunting ground for investors looking to take advantage of any continental economic resurgence.

Read more on this from LSE Group here and from S&P Global here