European megatrends: what's on my mind?

As with any investment, your capital is at risk. 

It is easy to view Europe as a region defined by low growth and political complexity. Yet across the continent, several powerful structural shifts are creating long-term opportunities for companies with durable competitive positions. While the portfolio's holdings are selected bottom-up, several common themes are emerging. In this article, Joe Faraday, head of European Equities, explores seven structural megatrends influencing current positioning and highlights the European businesses that appear well placed to benefit from them.

Rearmament and strategic sovereignty

Defence spending across Europe has shifted from political aspiration to fiscal commitment. NATO’s 2 percent of gross domestic product (GDP) target, once loosely observed, is now a minimum in many member states. The scale of the shift is material: European defence budgets are rising by tens of billions of euros annually, and procurement cycles are shortening.

The investment case is a structural reset in European defence spending that is likely to persist across political cycles. Rheinmetall is scaling production of munitions and land systems to meet this demand, supported by a multi-year order backlog spanning armoured vehicles, ammunition and electronics. Airbus combines a decade-long backlog in civil aviation with growing defence and space revenues, giving it one of the most diversified aerospace franchises globally. Tekever, held as a private investment, addresses the growing sovereign demand for autonomous drone intelligence, surveillance and reconnaissance (ISR) capability in border security and military missions.

The electrification bottleneck

Energy security has moved from aspiration to policy priority. Europe’s dependence on imported energy, made painfully visible by the events of 2022 and again in early 2026, has accelerated investment in grid infrastructure, renewables and flexible power generation. The capital required is enormous, and the investment timeline extends well beyond the current political cycle.

Across this theme, spending is structural, not discretionary. The businesses best placed to benefit are those with installed bases, long-duration contracts and technical capabilities that are difficult to replicate quickly. Iberdrola operates regulated networks with renewable generation at scale, positioning it directly for the electrification of transport, heating and industry. Nexans sits at the high-voltage and subsea cable bottleneck, a critical constraint on the pace at which grids can absorb new renewable capacity. Kingspan supplies insulation and building façade systems, where tightening efficiency standards and retrofit requirements are creating persistent demand for insulation and cladding systems that reduce energy consumption at source.

The productivity imperative

Europe’s weak productivity growth is not just a macro lament; it is a source of demand. Labour shortages and rising wage pressure are forcing businesses to invest in tools that improve throughput, reduce friction and automate repetitive tasks. The opportunity is broad, spanning sectors from kitchens and construction sites, to factory floors and office buildings. 

Rational provides automated cooking systems that save on kitchen labour, delivering measurable payback in commercial catering environments where staffing is the binding constraint. ASSA ABLOY supplies electromechanical access systems that enhance efficiency, security and operational flow within buildings. Nemetschek’s architecture, engineering and construction (AEC) design software is embedded in construction workflows, helping digitise an industry that has been stubbornly resistant to productivity gains. What links these businesses is the value to customers is measurable and immediate, with high switching costs once these solutions are embedded.

The semiconductor race

The semiconductor supply chain has become a theatre of strategic competition. The European Chips Act, alongside broader geopolitical tensions around advanced manufacturing, has elevated chip sovereignty from a niche technical issue to a policy priority.

The portfolio’s exposure here is concentrated in the irreplaceable links of the value chain. ASML holds a near-monopoly position in extreme ultraviolet (EUV) lithography, the essential requirement for advanced semiconductor manufacturing. ASM International occupies a similarly critical niche in atomic layer deposition, a process step that becomes increasingly important as chip architectures shrink. Deutsche Telekom, while not a chipmaker, provides the network infrastructure that enables the digital economy these chips power, combining a cash-generative European base with exposure to the US wireless market through T-Mobile.

The rise of artificial intelligence (AI) adds a further dimension. Businesses with proprietary datasets, large installed bases and deep customer relationships are better positioned to deploy AI tools effectively, creating a compounding advantage that is not fully reflected in valuations.

Healthcare resilience and biologics outsourcing

Healthcare is one of Europe’s deepest reservoirs of durable competitive advantage, yet it is often overlooked by growth investors in favour on faster-moving technology names. The portfolio’s healthcare exposure is centred on two structural shifts: the move toward personalised medicine and the increasing outsourcing of complex biologics manufacturing.

Roche combines a pharmaceutical pipeline increasingly focused on targeted therapies with a diagnostics business that creates a closed-loop advantage in companion diagnostics. Lonza provides outsourced biologics manufacturing, where validated processes take years to establish and customers rarely switch outsourcers once in production. Sartorius Stedim supplies the bioprocessing consumables and single-use systems embedded within validated workflows that underpin modern drug manufacturing. These are structural positions in the infrastructure of modern medicine, not cyclical healthcare plays.

State of the consumer

Across Central and eastern Europe, economies continue to formalise, with retail markets consolidating from fragmented, informal structures into modern, scaled operations. These are not emerging-market stories in the traditional sense, but European businesses operating in markets with significant structural runway. Each country differs, sometimes significantly so, and the sheer variety creates opportunities for investors willing to assess them individually.

Dino Polska is expanding its proximity-format grocery stores network into underserved rural areas of Poland, supported by a repeatable rollout model and a dense, integrated logistics system. Allegro.eu is building the dominant ecommerce marketplace in Poland, benefiting as online penetration deepens and consumer behaviour shifts. LPP’s Sinsay brand, a value-focused retail model built on low prices and rapid store rollout, is scaling rapidly across Central and eastern Europe, combining operational discipline with pricing that resonates in formalising markets.

Ownership structures

Europe’s varied ownership structures are more than a governance consideration; they are also a source of long-term compounding. The best holding companies and family-influenced groups combine patient capital allocation, long time horizons and alignment with minority shareholders in ways that widely held corporations often cannot.

Investor AB embodies the deeply institutionalised capital-allocation culture of the Wallenberg family, providing exposure to Atlas Copco, ABB and AstraZeneca at a persistent discount to net asset value across multiple generations. EXOR, controlled by the Agnelli family, compounds through Ferrari-led growth alongside patient portfolio recycling across Stellantis, Partners Group and other assets. Ackermans & van Haaren brings a family-influenced approach to a diversified portfolio spanning marine services, banking and industrial platforms, with multi-generational compounding as the organising principle. These structures reward the patient investor who is willing to accept the discount and trust the quality of long-term capital allocation.

Conclusion

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.
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• 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.
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• 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.
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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.

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