European Market Resilience Amid Global Turbulence

In 2025, European markets have demonstrated remarkable resilience amid global turbulence, outperforming U.S. equities despite headwinds from U.S. tariffs and geopolitical risks. The Morningstar Europe Index surged 9.8% in euros during the first five months of the year, building on a robust 2024 and 2023 [1]. This performance is underpinned by a 26% valuation gap between European equities (P/E of 15.99) and the U.S. S&P 500 (21.7x), making European assets a compelling value play [2]. The European Central Bank’s (ECB) aggressive rate cuts—reducing the deposit rate to 1.75% by year-end—have further bolstered financial conditions, particularly for sectors sensitive to interest rates [4].

Undervalued Sectors: Utilities, Real Estate, and Defense

Utilities have emerged as a standout sector, driven by rising industrial demand and green energy subsidies. Companies like Iberdrola and Engie have benefited from electrification trends and policy support, with European utilities surging 20% relative to the STOXX 600 in March 2025 [2]. Analysts highlight their defensive characteristics and stable cash flows, which make them ideal for a low-rate environment [5].

Real estate is another undervalued sector, trading at a 14x P/E—well below the S&P 500’s 25x multiple. German residential real estate, in particular, is poised to benefit from ECB rate cuts, as lower borrowing costs stimulate demand for mortgages and commercial properties [2]. Logistics assets are especially attractive due to strong demand fundamentals and limited supply, with the European Investment Atlas noting 82% of tracked markets as underpriced [5].

Defense stocks have surged over 60% in early 2025, fueled by increased military spending across the EU. Germany’s €800 billion defense funding plan over four years has created tailwinds for aerospace and defense firms, with CTT Systems AB and Safran Group trading at significant discounts to their estimated fair values [6].

High-Conviction Stock Picks

Several European stocks are trading below their intrinsic value, offering compelling entry points:
- Dormakaba Holding AG (CHF744): A global leader in access and security solutions, trading at a 50% discount to its estimated fair value of CHF1,452.75. Earnings are projected to grow at 24.9% annually [1].
- Safran Group (EUR 324): An aerospace and defense company with a wide economic moat, trading at a 10% discount to its fair value. Its exposure to defense modernization programs positions it for long-term growth [6].
- Next Geosolutions Europe (BIT:NXT): A key player in energy transition projects, undervalued by 27% despite a 19.26% CAGR in projected earnings. Its forward P/E of 12.09 is significantly lower than the Italian construction industry average [3].
- RWE (EUR 45.00): A utility giant benefiting from UK capacity auctions and renewable energy expansion, with a forward dividend yield of 4.4% [1].

Navigating Risks and Opportunities

While European markets offer attractive valuations, risks persist. U.S. tariffs, averaging 18%, threaten 25-30% of European companies’ sales, and political volatility in Germany and France could disrupt fiscal stimulus [1]. However, the ECB’s Transmission Protection Instrument (TPI) has reinforced the euro as a global refuge, drawing capital into high-quality European corporate bonds and defensive equities [5].

Investors are advised to adopt a barbell strategy: balancing exposure to undervalued sectors like utilities and real estate with high-quality assets to mitigate volatility. The ECB’s rate cuts and fiscal stimulus are expected to drive further gains in the second half of 2025, particularly in infrastructure and energy transition projects [3].

Conclusion

European markets are poised to outperform in 2025, supported by undervalued sectors, accommodative monetary policy, and strategic fiscal initiatives. Utilities, real estate, and defense offer compelling opportunities for investors seeking resilience amid global uncertainty. By targeting high-conviction stocks like Dormakaba, Safran Group, and RWE, investors can capitalize on Europe’s valuation gap and policy-driven tailwinds.

Source:
[1] Where Are Europe's Most Undervalued and Overvalued Stock Markets [https://global.morningstar.com/en-gb/markets/where-are-europes-most-undervalued-overvalued-stock-markets]
[2] Why European Equities Are the Smart Bet in 2025 [https://www.ainvest.com/news/european-equities-smart-bet-2025-valuations-stimulus-sectors-watch-2506/]
[3] European Investment Atlas | Q1 2025 [https://www.cushmanwakefield.com/en/insights/european-investment-atlas]
[4] Market Tension Shapes 2025 Investment Outlook [https://www.vanguard.co.uk/professional/insights-education/insights/market-tension-shapes-2025-investment-outlook]
[5] The ECB's Cautious Tightrope: Navigating Rate Cuts and ... [https://www.ainvest.com/news/ecb-cautious-tightrope-navigating-rate-cuts-market-opportunities-2025-2509/]
[6] European Stocks Estimated To Be Undervalued In August 2025 [https://finance.yahoo.com/news/european-stocks-estimated-undervalued-august-054447258.html]