Europe’s next growth cycle Is being built from the ground up

Europe is entering a period of significant investment as companies respond to a world that has become less predictable, less energy-abundant and more strategically competitive. From power grids and defence systems to semiconductors, digital infrastructure and industrial automation, the investment required to strengthen Europe’s resilience is creating a new source of demand across the economy.

This is more than a response to a changing geopolitical environment. It has the potential to reshape where capital is deployed, which industries expand and which companies capture the economic value of Europe’s transformation. For investors, the key question is whether this emerging investment cycle can translate into sustained gains in productivity and long-term growth.

Europe is responding to a changed world

For decades, Europe’s economic model rested on assumptions that increasingly no longer hold: abundant and inexpensive Russian energy, highly efficient global supply chains and a relatively benign security environment. Russia’s invasion of Ukraine, the pandemic, trade tensions and a more fragmented geopolitical order, particularly in the Strait of Hormuz, have exposed the vulnerabilities behind that model.

These challenges, identified in the 2024 Draghi report on EU competitiveness, are now translating into budgets, industrial strategies and corporate investment plans. Strategic autonomy is moving from an abstract political concept towards a source of real economic demand.

The investor opportunity is in the implementation

There are encouraging signs. Across the continent, companies are already investing in the infrastructure required for electrification, digitalisation and greater security. Demand is rising for electricity grids, defence systems, advanced semiconductors, space and digital infrastructure, and the specialised technologies that underpin them.

Much of Europe’s transformation will be driven not by household-name companies, but by the specialised businesses providing the technologies, components and expertise that turn ambitious plans into reality. This is particularly relevant in European small and mid-cap equities.Companies operating in areas such as sensors, power management, industrial automation, cybersecurity, grid equipment and specialised engineering can be important enablers of the broader transformation, while often receiving less attention than the largest companies.

For investors, the task is to distinguish between companies merely exposed to Europe’s transition and those with the technology, market position and execution capabilities to capture its economic value. Selected European companies, particularly outside the largest index constituents, can also offer exposure to these structural trends at valuations below those of many global growth markets.

Where Europe’s transformation creates opportunity

Europe’s investment needs are increasingly concentrated in the foundations of its future economic and strategic security. Securing energy, rebuilding infrastructure, strengthening defence and developing critical technologies will require sustained investment well beyond the current political cycle.

The scale and persistence of these needs suggest that Europe’s investment cycle could extend well beyond the immediate response to today’s geopolitical challenges.