Investment Management

Investing in Europe Means Looking Beyond the Index

Nov 4, 2026

Europe’s economic challenges haven’t disappeared, but a new policy regime and multiyear capital cycle could create opportunities for long-term investors.

Author
Jitania Kandhari, Deputy CIO of the Solutions & Multi-Asset Group, Morgan Stanley Investment Management

Key Takeaways

  • European governments are placing greater emphasis on economic security, strategic autonomy and industrial resilience, redirecting capital toward strategically important industries.
  • Defense, energy, digital infrastructure, advanced manufacturing and critical technologies could benefit from increased spending after years of underinvestment.
  • Investors should look across borders as rearmament, electrification, automation and AI infrastructure span multiple European markets and may be better approached as continental themes than individual country allocations.
  • Europe’s capital cycle creates potential opportunities across sovereign and corporate credit, infrastructure and private markets, making the investment case inherently multi-asset.

Europe is undergoing its most significant economic policy shift since the creation of the euro. After decades in which fiscal restraint, globalization and market efficiency shaped policy, governments across the region are increasingly focused on economic security, strategic autonomy and industrial resilience.

 

The shift is redirecting capital toward defense, energy, digital infrastructure, advanced manufacturing and critical technologies—areas that received systematic underinvestment for much of the post-Cold War era.

 

Europe still faces longstanding challenges, including weak productivity, unfavorable demographics, expensive energy and institutional fragmentation. But for investors with a long-term horizon, the change in policy direction and an emerging multiyear capital expenditure cycle may create an opportunity set with a different return profile from that of the past decade.

 

A Cross-Region Transformation

Across Europe, countries are adapting to a changing geopolitical and economic environment. Conflicts in Ukraine and the Middle East have exposed insufficient investment in energy, the region’s structural dependence on Russian gas and the need for greater defense spending.

 

China’s evolution from customer to competitor has added pressure on Europe to upgrade its manufacturing base and accelerate technological innovation. Industrialization is increasingly shifting toward Eastern Europe, which offers competitive energy costs, skilled engineering labor, available factory capacity and geographic proximity to the defense supply chains that NATO is urgently rebuilding.

 

Meanwhile, the countries at the center of the eurozone debt crisis in the 2010s, including Portugal, Ireland, Italy, Greece and Spain, spent much of the past decade reducing private debt, rebuilding external balances and recapitalizing banks. As a result, they entered the current expansion with greater fiscal and financial flexibility than some of their core European counterparts.

The geopolitical shocks of the past four years have created a coalition broad enough to act, contributing to a looser fiscal framework and greater willingness to direct investment toward strategic priorities.

 

 

A Regime Change, Not a Renaissance

Europe is mobilizing and changing its trajectory, but it hasn’t resolved some of its structural problems. This distinction is critical to the region’s investment case.

 

The European Union has not produced a global-scale platform company in a generation, while venture funding remains at a fraction of U.S. levels. Fragmented capital markets also constrain the ability to fund companies at scale.

 

Demographics present another challenge. A shrinking working-age population, rising pension costs and a hardening political consensus against non-EU migration are contributing to labor supply constraints that industrial policy cannot directly address.

 

What has changed is the political environment. The geopolitical shocks of the past four years have created a coalition broad enough to act, contributing to a looser fiscal framework and greater willingness to direct investment toward strategic priorities.

 

From Geography to Portfolio

For investors, constructing a European portfolio may increasingly require looking beyond broad country allocations to individual markets and structural themes that span national borders.

 

Defense rearmament and industrial automation, for example, create investment opportunities across France, Germany, Sweden, Britain and, increasingly, Poland. No single country allocation captures the full theme.

 

Similarly, investment in power infrastructure and electrification stretches from the Netherlands and Germany to Spain, France, the Nordics and Eastern Europe.

 

Artificial intelligence presents another example. Europe is unlikely to challenge the U.S. in frontier labs. Instead, the region’s comparative advantage may lie in the industrialization layer of AI, particularly the “picks and shovels” of the buildout, including semiconductor capital equipment, grid transformers, gas turbines and industrial automation.

 

Banks could also play an important role. They are not only potential beneficiaries of economic expansion but also key transmission mechanisms. European financing remains predominantly bank-led, unlike in the U.S., where capital markets are the primary source of financing.

 

A Barbell Approach to Europe

The resulting European portfolio has a natural barbell structure combining country convergence with continental themes. On one side are country exposures where domestic macroeconomic improvement is the primary potential return driver.

 

On the other side are cross-border themes—particularly rearmament, electrification, automation and AI infrastructure—that may be better constructed from the bottom up across markets rather than through broad country allocations.

 

The opportunity extends beyond equities to sovereign and corporate credit, infrastructure and private markets. For asset owners, Europe’s new capital cycle is inherently multi-asset.

 

Nor is the opportunity uniform or necessarily well captured by the MSCI Europe Index. In Southern and Eastern Europe, the country itself can be the investment thesis. Elsewhere, the more compelling expression may lie in companies exposed to structural themes that transcend national borders.

 

If the last decade rewarded investors for looking past Europe, the next may reward them for looking beneath the index.

Sources and Disclosures

source: https://www.morganstanley.com/im/en-us/individual-investor/insights/big-picture/mapping-europes-barbell.html

 

INDEX DEFINITIONS

The MSCI Europe Index is a free float-adjusted market capitalization index that is designed to measure developed market equity performance in Europe. The term “free float” represents the portion of shares outstanding that are deemed to be available for purchase in the public equity markets by investors. The performance of the Index is listed in U.S. dollars and assumes reinvestment of net dividends. The MSCI All Country World Index (ACWI) is a free float-adjusted market capitalization weighted index designed to measure the equity market performance of developed and emerging markets. The term “free float” represents the portion of shares outstanding that are deemed to be available for purchase in the public equity markets by investors. The performance of the Index is listed in U.S. dollars and assumes reinvestment of net dividends. The MSCI U.S. Index is designed to measure the performance of the large and mid cap segments of the U.S. market. The MSCI EFM Central and East Europe and CIS Index captures large and mid cap representation across 3 Emerging and 7 Frontier Markets countries. The Index covers approximately 85% of the free float-adjusted market capitalization in each country.

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