Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Global investors are pouring record sums into European equities, as a desire to reduce exposure to the US meets growing optimism over the state of the region’s economy.
European stocks are headed for their highest ever monthly inflows in February, following two consecutive record weekly flows of about $10bn, according to data from EPFR, which tracks ETF and mutual fund flows.
The continent’s blue-chip Stoxx Europe 600 index has punched through a series of record highs this month, as have indices in the UK, France and Spain. European bourses have benefited from big investors’ desire to diversify away from Wall Street and its massive technology sector, which has been buffeted this year by concerns over a potential AI bubble.
“It’s a lot of global investors wanting to diversify away from an expensive US market,” said Sharon Bell, senior equities strategist at Goldman Sachs, adding this was particularly the case for US-based investors looking overseas. “Europe as an equity market offers a different exposure . . . there’s less tech.”
A rotation in stock market leadership away from the AI giants has boosted European markets with their heavy weighting to “old economy” sectors such as banks and natural resources. The booming demand for physical assets has propelled the UK’s FTSE 100 almost 7 per cent higher this year, with stocks such as Weir Group and Antofagasta up more than 20 per cent.
Much of the cash has flowed to funds exposed to non-US markets, rather than funds tracking Europe specifically, amid fears that global portfolios have become overly dominated by expensive AI-linked stocks.
That diversification has powered a host of other global markets ahead of Wall Street this year. The S&P 500 index sits 76th out of 92 major benchmarks tracked by Bloomberg this year.
“Diversifying your currency, diversifying your sector and diversifying your country has become the hottest topic,” Bell said. “People are effectively scanning the world and saying — which are the cheapest pockets? Where are the opportunities?”
Many investors believe Europe offers one such opportunity: the Stoxx Europe 600 trades at a price-to-earnings ratio of 18.3, compared with 27.7 for the S&P, according to LSEG data.
Europe-focused funds have also attracted steady inflows over the past 12 months, following years of relentless outflows, the EPFR data shows, helped by signs that the gloom over the economy is fading.
Germany, the region’s powerhouse, returned to growth last year for the first time since 2022, according to data published last month. A more recent jump in German factory orders has buoyed markets as investors seize on signs that the historic defence spending spree announced last March is feeding through to industry, prompting Bank of America analysts to upgrade German equities to overweight.
Beata Manthey, head of European and global equity strategy at Citibank, said the interest in European stocks had been driven by “domestic stimulus delivery” as well as a rotation towards non-tech sectors.
Defence stocks, which soared last year, have made further gains, with Germany’s Rheinmetall up 12 per cent in 2026 and the UK’s BAE Systems rising 26 per cent.
“It was always going to take time to build out that capacity and make the [German stimulus] money get to the place it needs to be . . . but it’s undeniable that it’s happening,” said Manthey.
Matthias Klein, a senior equity salesman at Bank of America, said the bank had seen “renewed interest” in German infrastructure companies.
“If you are a macro investor based anywhere in the world, this German story is one of the top two or three themes that you will consider pertinent for this year,” he added.
While the biggest inflows have come from domestic European investors and from the US, analysts cite rising demand from Asian buyers too.
Tomochika Kitaoka, chief equity strategist at Nomura, said “Japanese investors’ interest in European equities looks bigger and bigger”, pointing to relatively low valuations in Europe compared with other regions.
Even so, some investors remain sceptical of European stocks’ ability to deliver profit growth that can rival Wall Street. S&P companies are on course for year-on-year earnings growth of more than 12 per cent during the current fourth-quarter results season, compared with just less than 4 per cent in Europe, according to Barclays.
Hani Redha, a multi-asset portfolio manager at PineBridge Investments, said he was bullish about the impact of German stimulus on European markets — but is buying specific stocks rather than indices as a whole.
“We don’t buy European equities, we don’t buy the Dax,” he said. “We have very targeted [ways] to get exposure to that theme.”