For a decade, the smart money treated Europe as a place of sluggish growth and modest returns. That consensus is fraying. A cluster of major asset managers, including Lazard, Edmond de Rothschild, MFS, Aberdeen and Neuberger, now argue the continent has reached an inflection point, driven by rearmament, reindustrialisation and the physical infrastructure both demand.

The numbers behind the construction boom

Craig Wright, who heads European and Asia-Pacific real estate investment research at Aberdeen, puts the scale of what is coming in concrete terms. The European Union's Made in Europe initiative, which targets manufacturing output at 20% of GDP by 2035, will demand roughly 20 million square metres of new industrial and logistics space every year for a decade. Defence spending adds another 37 million square metres on top. E-commerce growth sits alongside both.

Those figures are striking because they describe physical construction, factories, warehouses, logistics hubs, semiconductor plants and pharmaceutical facilities, rather than abstract policy ambitions. If even half the projected building takes place, the demand for materials, labour and capital will reshape several property and industrial sectors simultaneously.

Growth surprises to the upside

The construction thesis rests on more than policy declarations. Benoit Anne, a strategist at MFS Investment Management, notes that the Eurozone Citi Economic Surprise Index has climbed to its highest reading since early 2023. Leading indicators, he says, point to a recovery stronger than markets had priced in. That resilience reinforces the case for European equities and credit alike.

Edmond de Rothschild Asset Management describes what is happening as a "silent revolution": spending on infrastructure, defence, electrification and artificial intelligence that spreads across the industrial value chain rather than concentrating in a handful of large-cap stocks. Small and mid-cap companies, often overlooked in European portfolio allocations, stand to gain disproportionately.

Where fixed income fits

The bond market tells a more complicated story. Anne rates European high yield as the most attractive asset class globally on a risk-adjusted carry basis. Paul Grainger, managing director and senior portfolio manager for fixed income at Neuberger, takes a different angle: Europe remains more sensitive to interest rates than other regions, and growth still carries vulnerabilities. He regards those very weaknesses as the reason European fixed income now looks interesting.

Grainger points out that European real yields have risen as the European Central Bank has tightened policy and allowed markets to price in further hikes. Markets currently expect two additional increases over the coming year, which would bring the official rate to 2.75%. The impact of artificial intelligence spending appears smaller in Europe than in the United States, Grainger adds, but correlations between major developed bond markets still matter.

The war drag on growth forecasts

Geopolitics clouds the picture. Ronald Temple, chief market strategist at Lazard, says the war with Iran has penalised Eurozone growth forecasts more heavily than those of any other major developed economy this year. Energy price volatility remains a direct channel through which the conflict feeds into inflation.

Temple nonetheless expects the region's GDP to accelerate into 2027, carried by infrastructure and defence spending. He sees little evidence that energy price pressures are spilling into the broader economy, which gives him confidence that inflation will ease by 2027.

Why indexes may mislead

One thread running through the managers' analysis deserves attention: the opportunities lie in specific sectors and companies, not in broad European indexes. The Stoxx 600 or the MSCI Europe are weighted toward banks, luxury goods and energy incumbents. The firms that benefit from a decade of factory construction, semiconductor plant buildout and military procurement look rather different. Investors buying Europe through passive index funds may capture the headline rally without exposure to the structural shift driving it.

People mentioned

  • Benoit Anne

    Strategist, MFS Investment Management

  • Craig Wright

    Head of European and Asia-Pacific Real Estate Investment Research, Aberdeen

  • Paul Grainger

    Managing Director and Senior Portfolio Manager for Fixed Income, Neuberger

  • Ronald Temple

    Chief Market Strategist, Lazard

Organisations

MFS Investment Management · Aberdeen · Neuberger · Lazard · Edmond de Rothschild Asset Management · European Central Bank