In the global asset management firm’s latest report, Gateway to Europe, chief investment officer Vincenzo Vedda explained that while Europe’s growth has long been disappointing, this trend may now be changing.
“Europe is undergoing a fiscal and regulatory reset aimed at shoring up its defences, reinforcing economic stability and boosting long-term competitiveness by embracing innovation,” Vedda said.
“There are potential opportunities for international investors to deploy new growth strategies across multiple asset classes. Currently, European equities remain undervalued compared to their global peers, fixed income yields appear attractive and private markets and real assets could be propelled by policy-driven tailwinds.”
The region’s vulnerabilities were exposed by Russia’s invasion of Ukraine – and before that, by the COVID-19 pandemic – but Europe is now planning to leverage its leadership in clean energy and advanced manufacturing to establish itself as a global innovation hub.
“Instruments such as the Innovation Fund, Horizon Europe and Invest EU support channelling capital into critical technologies. The result may be that after many years of excessive German fiscal caution, a major revitalisation is taking place which could raise its previously tepid growth rate,” Vedda said.
In pursuit of transformation, the EU and its member states are rolling out ambitious financing strategies to unlock public and private capital at record pace. Reform efforts aim to streamline cross-border investment, standardise insolvency laws and strengthen equity market engagement.
“These initiatives aim to unlock deep pools of private capital, particularly for SMEs, start-ups and most needed for scale-ups, and improve Europe’s attractiveness relative to the US and Asia,” Vedda said.
Although 2025 has seen higher US import tariffs and trade uncertainty, which have weakened global confidence, DWS noted that significant fiscal and political changes have occurred in Germany and across Europe.
“After many years of extreme caution, especially in Germany, the continent’s largest economy, fiscal policy has become more expansive and fresh investment initiatives are being launched. We view these developments positively. Europe’s growth should be bolstered and the region’s appeal enhanced,” Vedda said.
DWS forecasts that the eurozone consumer price index (CPI) inflation will average 2 per cent in 2026 and consequently meet the ECB’s inflation target.
“This environment should ensure eurozone interest rates remain low for most of next year ... Europe is therefore likely to achieve an economic upswing, coupled with moderating inflation, fiscal headroom and a political environment that is comparatively stable with strong institutions and a rules-based approach that is expected to stay even in case of political turbulences in some member countries of the European Union,” Vedda said.
The firm observed that in the coming year, the US is likely to experience a further year-on-year growth slowdown. In contrast, rising private domestic consumption, supported by strong labour markets, is expected to boost eurozone gross domestic product growth – potentially bringing it close to US levels.
While eurozone inflation is forecast to ease slightly next year, US CPI inflation is expected to remain stubbornly above the Federal Reserve’s 2 per cent target.
“After years in which the US has outperformed and global investors have increased their exposure to US assets, a reassessment may be taking place,” Vedda said.
Amid heightened geopolitical risks and in response to structural weaknesses, Europe appears to be pursuing a path of strategic adaptation, according to DWS.
“These efforts at revitalisation in Europe coincide with a marked rise in economic uncertainty in the US where trade and growth rates may decline ... Europe’s attractiveness as an investment location is increasing,” he said.
According to the latest Morningstar data, investors have remained cautious towards both US equity and bond markets. In the second quarter of 2025, US large-blend equity exchange-traded funds (ETF) experienced outflows of approximately €3 billion, while European and eurozone equity ETFs attracted nearly €8 billion in inflows during the same period.
“For several months now, global investors have been reallocating their funds from US equities and fixed-income securities to European assets … particularly to Germany,” Vedda said.
DWS highlighted concerns that excessive fiscal policy in the US may be driving a shift in investment from the US to Europe, with German government bonds positioned as likely beneficiaries.
“Thanks to currently attractive yields, a steeper yield curve and the prospect of a further interest rate cut by the ECB, we believe that German government bonds are currently particularly appealing, especially compared with US government bonds.
“Investors seem incredibly convinced that diversifying away from US Treasuries and into German government bonds could be an attractive portfolio strategy,” Vedda said.
While European real estate is also undergoing a notable resurgence, drawing increased interest from global investors, with the region’s property market described as a strategic “pinch-hitter”.
“The region is currently benefiting from historically low supply levels, land scarcity and stringent planning regulations, which is contributing to structurally low vacancy rates, approximately half the level of the US,” Vedda said.
“Europe appears to be stepping up underpinned by improving liquidity, supportive fiscal policy and persistent supply constraints.”
The firm emphasised that one of this year’s most remarkable equity market stories is the DAX’s impressive performance compared to the S&P 500 – its strongest showing since the 1960s. As of 25 August, the DAX has climbed over 20 per cent in euros (about 37 per cent in US dollars), while the S&P 500 has gained roughly 10 per cent year-to-date in dollars. However, because of the weak dollar, the S&P 500’s gains convert into a slight loss when measured in euros.
In terms of foreign exchange, DWS noted a certain scepticism towards the dollar is increasingly preoccupying the markets.
“Although the dollar has traditionally been a reliable diversifier during periods of market volatility, the current market phase appears to be different, with the US itself becoming a source of turbulence in the financial markets,” Vedda said.
“This is reflected in the US dollar index’s worst performance since the introduction of flexible exchange rates in 1973: it depreciated by just over 10 per cent in the first half of 2025 and suffered additional losses against the euro.
The situation is further complicated by the historically stable correlation between the US dollar and US government bond yields, which has largely broken down since Liberation Day in April.
“In our view, this reflects concerns about US trade policy, high credit demand and the independence of the US Federal Reserve. The structural issues present a significant challenge for international portfolios,” Vedda said.
“We expect the strength of the EURUSD levels to stay amid increased uncertainty and investors diversifying.”
