Europe Insights
Key Highlights:
- Recent FDI patterns suggest Europe’s structural shift towards supply-chain diversification and nearshoring strategies – reinforced by a series of policy initiatives spanning regulatory reform and targeted financial incentives – is gathering pace
- There has been a pronounced shift in investment flows. Europe saw mixed Q2 earnings and sectoral divergence: headline earnings rose 4.2 per cent year-on-year, surpassing expectations, but performance varied significantly across sectors
- Europe’s credit markets have outperformed their US counterparts over the past decade, supported by conservative corporate financial policies and a larger share of higher-rated issuers, offering superior risk-adjusted returns
Europe’s supply-chain diversification and nearshoring strategies
The European Union (EU) remains a critical hub for global trade and investment, but foreign direct investment (FDI) inflows have halved since the Covid-19 pandemic and energy crisis. Despite this decline, structural patterns are emerging across regions and sectors, with 60 per cent of FDI into Europe now originating from within the region itself. Countries in Eastern and Southern Europe continue to attract investment, supported by robust infrastructure and skilled workforces. Similarly, sectors such as R&D, logistics and defence are gaining momentum, while manufacturing FDI has declined due to elevated energy costs and uncertain demand. These trends highlight a growing shift to nearshoring and supply-chain diversification, further bolstered by recent EU policy initiatives.
Green shoots amid uneven earnings in European equities
Shifting investment flows across Europe are also beginning to be reflected in corporate performance. For instance, Europe’s second-quarter earnings season closed with a 4.2 per cent year-on-year increase, comfortably surpassing flat expectations, although the results varied significantly across sectors. Firms with a domestic focus have fared better than those exposed to emerging markets, although US-exposed revenues remain resilient. Despite the recent rally, valuations in European equity markets remain low, presenting re-rating potential in certain sectors.
Relative resilience in European credit markets
European credit markets continue to demonstrate a structural advantage over their US counterparts. Over the past decade, a like-for-like comparison of the two markets reveals that European credit has delivered superior risk-adjusted returns. Credit quality differences add to Europe’s relative strength, particularly in the high-yield universe, which carries a higher share of BB-rated names (historically the best risk-adjusted performers), while the US is heavier in CCC-rated bonds, the weakest cohort. For global investors, Europe’s fixed income markets offer diversification and favourable risk-adjusted returns, making them an attractive counterpart to US credit.