Conflict in the Middle East this year dented confidence in European stocks in particular, with the market experiencing a 12% downturn from February’s peak as the war began.
This was partially due to the region’s high dependence on imported oil, with supply chain disruptions causing a spike in inflation. In a double-blow, the bloc’s dependence on consumer-facing industries, such as hospitality, also didn’t help, as people felt the pinch of higher costs.
But can European stocks recover and, if so, what is the story driving potential gains? The bloc is already seeing signs of renewed optimism among investors, with the Euro Stoxx index up about 10.4% year to date, above its pre-conflict level, according to FE fundinfo data.
Karen Ward, EMEA chief market strategist at JPMorgan Asset Management (JPMAM), said Europe was certainly the region that suffered the most short-term damage from Iran. However, she argued that the impact of the war was slightly overblown, and with an end to the conflict seemingly in sight, there was reason to reconsider returning to the region.
“We didn’t think the war in the Middle East was a massive game changer for Europe,” she said.
See also: F&C’s Niven: ‘Europe rallied based on hope’
Pras Jeyanandhan, co-manager of the VT Tyndall European Unconstrained fund, argued that the conflict has led to a “rewiring” in Europe, which is making some stocks more exciting.
Jeyanandhan conceded: “The war in Iran was initially seen as a significant challenge for Europe, given the continent’s reliance on imported energy.”
While Europe imported almost 58% of its fuel in 2025, according to data, the continent is rebuilding its supply chains, energy networks and defence for greater resilience, he argued.
“Many of the assumptions that shaped a generation of investment from cheap Russian energy, US security guarantees and frictionless global trade no longer hold.
“What’s emerging in their place is a Europe investing heavily in its own resilience, and that is throwing up many opportunities.”
He is not the only portfolio manager to take note of this. Daniel Avigad, portfolio manager at Lansdowne Partners, added: “America’s quiet – then loud – withdrawal from Europe has turned self-sufficiency in defence, energy and critical industries from a matter of debate into an urgent policy priority.
“Germany’s decision to publish its first military strategy since the Second World War is the clearest sign yet Europe no longer assumes Washington is its anchor of security.”
For example, Avigad said ammunition is becoming a big theme as European governments have committed to increasing defence spending.
Most investors have played this using larger defence stocks such as Rheinmetall, according to Tyndall’s Jeyanandhan.However, there are also opportunities to invest in some underappreciated opportunities, such as German chemical company AlzChem, which makes chemical propellants for weaponry
“That makes it a critical, if under-the-radar, part of the supply chain,” Jeyanandhan said.
Other stocks had been sold off indiscriminately during the conflict, he argued, and so now seemed more attractively valued.
See also: BoA Merrill Lynch: Record number of European fund managers rotate into US stocks.
He and his co-manager Mike Clements liked budget airline Ryanair, which has been swept up in elevated fuel prices, with the stock price down 9% this year, according to Google data.
“This [Ryanair] is easily the best-quality airline in Europe but has been unfairly caught up in the sector-wide weakness,” the Tyndall team said.
He argued it was incredibly well-protected, with around 80% of its 2027 fuel needs already hedged and net cash of well over €2bn.
With the crisis likely to force weaker, indebted rivals to consolidate or feel most of the financial strain, a best-in-sector business like Ryanair seems to be a clear winner, according to the Tyndall manager.
JPM’s Ward said: “We’ve had a horrible long cycle certainly, but we’re now in a much different policy regime, that should be much better for European growth.
“People have this perception that Europe is structurally incapable of growth, and I just don’t think that’s correct.”
On top of this, the region had a lot going for it that the conflict did not affect, such as its ability to serve as a hedge.
JPM’s Ward said: “One of the main reasons I’ve remained bullish on Europe this year is because I don’t know how big AI will get, but I don’t want all my allocation in one theme.”
Tech companies have surged this year, with Taiwan up 65% year to date according to FE fundinfo, mostly due to its large tech exposure. By contrast, Europe has lagged due to its relative lack of tech exposure, with the Euro Stoxx instead dominated by banks (16.4%) and industrials (15.9%).
“If I’m investing globally or in the US, 50% of my entire stock allocation rests on AI playing out well.”
While this could work out, she conceded, it could also go very wrong, which means from a global perspective, it makes sense to have some diversification.
See also: BofA survey: Fund managers gloomy on European equities as war sends oil up.
