The European opportunity set

As with any investment, your capital is at risk. 

European equities are often treated as a macro trade: a region defined by political compromise, energy shocks and uneven growth. While that framing is understandable, it misses the point entirely. Europe is far better understood and appreciated as a remarkably diverse opportunity set comprising scarce industrial assets, specialised know-how, powerful brands, local champions and a wide range of ownership structures. The region offers many routes to value creation, not one style of growth.

Investing in Europe is less about chasing the highest reported growth rate and more about identifying sources of durable compounding. In Europe, that often means broadening the definition of growth to include reinvestment at attractive returns, structural share gains, consolidation, balance-sheet repair and better capital allocation, alongside the more obvious long-duration compounders. Growth comes in many different forms, and whichever ones they are, across countries, sectors, industries and company types, it is key, as a growth investor, to have the nose, aptitude and willingness to latch on to them.

Process is paramount because the opportunity set is broad and outcomes are dispersed. The investment horizon is typically three to five years or longer. Research is conducted widely, comparisons drawn relentlessly and portfolios constructed so that active risk is deliberate rather than accidental or solely thematic. The resulting portfolio is intentionally eclectic. It contains world leaders and local champions, faster growers and steadier compounders, quality franchises and improvement stories. The aim is a portfolio that can make progress through different market environments, with returns driven primarily by stock selection, rather than a single macro or thematic regime.

The opportunity set

Europe is not one market. It is a patchwork of national economies with distinct industrial traditions, regulatory frameworks, ownership cultures and capital market structures. That complexity is usually treated as a headwind. For a bottom-up stock picker, it is an advantage. Europe’s fragmentation creates local champions with genuine pricing power, structural inefficiencies that sustain mispricing and a range of business models that do not exist elsewhere.

The breadth of opportunity in Europe is striking. ASML has a near-monopoly in extreme ultraviolet lithography, while Richemont and Moncler are irreplaceable in the luxury industry. Roche anchors European healthcare with a diagnostics moat and deep pipeline. Beyond these well-known names, Europe also offers world-class businesses in less visible niches: Rational in professional kitchen equipment, Nemetschek in architectural software and ASM International in semiconductor deposition. These companies may not be household names, but each occupies a position that is difficult to replicate and enduring over time.

The region’s diversity extends to growth profiles. Northern Europe offers technology platforms and digital infrastructure. Southern Europe provides financials undergoing improvement and consumer franchises with pricing power. Central and eastern Europe hosts some of the fastest-growing retailers and banks on the continent, operating in markets that are still formalising. Holding companies listed in Belgium and Sweden offer diversified exposure to quality assets at persistent discounts to net asset value. Energy majors such as TotalEnergies generate substantial cash and maintain capital discipline. This breadth means that an active manager willing to look broadly can build a portfolio with multiple, independent sources of return.

Ownership and management structures add a further layer of differentiation. Family-controlled businesses such as Moncler and the Wallenberg group companies bring long-term thinking and alignment with minority shareholders that is often absent in widely held companies. Foundation-owned businesses, common in the Nordics, tend to prioritise reinvestment and stability. Meanwhile, previously state-influenced enterprises, particularly in Southern European financials and energy, are evolving rapidly as governance improves and capital discipline tightens. Assessing these dynamics is central to understanding time horizon, capital allocation and downside protection.

Valuation adds a further dimension. European equities as a whole trade at a persistent discount to US markets. That discount is not itself an investment thesis, but it does mean that European businesses with comparable returns on capital and growth profiles often trade at materially lower multiples. For a long-term investor, that is relevant. It means that compounding starts from a lower base valuation and that re-rating, when it occurs, provides an additional return on top of underlying business performance.

Europe’s policy priorities reinforce several of these structural opportunities. The European Chips Act, the energy security imperative, rising defence spending and the push for investment in digital infrastructure create meaningful tailwinds for selected businesses. Even so, policy tailwinds do not remove execution or valuation risk. Therefore, our focus is to identify and own the businesses best positioned to benefit at prices that offer a margin of safety, rather than buying into a theme. This distinction is important. Themes can underperform for years, even when the underlying trend remains intact, individual business within that theme, if well chosen, can compound regardless.

Risk Warnings

The investment trusts managed by Baillie Gifford & Co Limited are listed UK companies. The value of their shares, and any income from them, can fall as well as rise and investors may not get back the amount invested.

The specific risks associated with the Trust include:

• The Trust invests in overseas securities. Changes in the rates of exchange may also cause the value of your investment (and any income it may pay) to go down or up.
• Unlisted investments such as private companies can increase risk. These assets may be more difficult to sell, so changes in their prices may be greater.
• The Trust can borrow money to make further investments (sometimes known as "gearing" or "leverage"). The risk is that when this money is repaid by the Trust, the value of the investments may not be enough to cover the borrowing and interest costs, and the Trust will make a loss. If the Trust's investments fall in value, any invested borrowings will increase the amount of this loss.
• Values for securities which are difficult to trade such as private companies may not be readily available and there can be no assurance that any value assigned to such securities will accurately reflect the price the Trust might receive upon their sale.
• The Trust's risk is increased as it holds fewer investments than a typical investment trust and the effect of this, together with its long term approach to investment, could result in large movements in the share price.
• The Trust can make use of derivatives which may impact on its performance.
• Share prices may either be below (at a discount) or above (at a premium) the net asset value (NAV). The Trust may issue new shares when the price is at a premium which may reduce the share price. Shares bought at a premium may have a greater risk of loss than those bought at a discount.
• The Trust can buy back its own shares. The risks from borrowing, referred to above, are increased when a trust buys back its own shares.
• The aim of the Trust is to achieve capital growth. You should not expect a significant, or steady, annual income from the Trust.
• The Trust is listed on the London Stock Exchange and is not authorised or regulated by the Financial Conduct Authority.

The information and opinions expressed are subject to change without notice. This information does not in any way constitute investment advice or an offer or invitation to deal in securities.

Baillie Gifford & Co and Baillie Gifford & Co Limited are authorised and regulated by the Financial Conduct Authority (FCA). The investment trusts managed by Baillie Gifford & Co Limited are listed on the London Stock Exchange and are not authorised or regulated by the FCA.

A Key Information Document is available at bailliegifford.com.

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