10:29 pm - February 4, 2026
Investor interest in European stock markets has experienced a dramatic turnaround in 2025, with flows into European equity funds reversing a year of sustained withdrawals. According to analysis from UK investment platform Hargreaves Lansdown, European fund inflows on its platform reached £69.4 million in the year to date, a sharp contrast to net outflows totaling £207 million during the same period in 2024. The firm attributed this shift to growing investor concerns about elevated valuations in US markets and an increasing appetite for diversification.
The reversal in European equity fund flows suggests a potential reallocation of capital among investors seeking alternatives to richly valued American stocks. Hargreaves Lansdown noted that institutional investors are also participating in this trend, citing New Zealand’s Super Fund as an example of a major institution that has increased its allocation to European shares while reducing exposure to US markets.
Valuation Gap Attracts Investors to European Equity Funds
Kate Marshall, lead investment analyst at Hargreaves Lansdown, highlighted that European stocks currently offer both value and diversification opportunities for investors. According to the analysis, European equities are trading at a discount compared to both their historical valuations and their US counterparts, creating a potential entry point for value-oriented investors.
However, the firm acknowledged that this valuation gap reflects persistent concerns about slower economic growth and ongoing political uncertainties across the European continent. Despite these challenges, Hargreaves Lansdown suggested that an improvement in regional sentiment could provide significant upside for share prices, particularly as geopolitical trends support specific sectors.
Defense and Energy Security Drive Sector Growth
The analysis identified several geopolitical factors that could bolster European equity funds and support regional economic growth. Increased defense spending across Europe has emerged as a major theme, with governments responding to ongoing security concerns by boosting budgets for aerospace, defense, and industrial sectors.
Additionally, energy security has become a central focus for European policymakers and investors alike. Following the 2022 energy crisis, the European Union has significantly increased investment in renewable energy infrastructure, power grid modernization, and liquefied natural gas facilities to reduce dependence on external energy suppliers. According to Hargreaves Lansdown, Europe now invests ten times more in clean energy than in fossil fuels, potentially creating opportunities for utilities and clean energy companies.
Supply Chain Independence Supports Manufacturing
Meanwhile, European governments are placing greater emphasis on reducing reliance on overseas suppliers for critical goods, including pharmaceuticals and semiconductors. This strategic shift could benefit manufacturing and innovation sectors over the long term, according to the investment platform’s analysis.
The combination of defense spending, energy infrastructure investment, and supply chain reshoring represents a multifaceted approach to strengthening European economic resilience and independence.
Fund Options for European Market Exposure
In contrast to broad market indices, Hargreaves Lansdown highlighted three specific funds for investors considering targeted European equity fund exposure. The BlackRock Continental European Income fund focuses on larger, established businesses, with managers Brian Hall and Stuart Brown emphasizing cash-generative companies in industrials, financials, and utilities sectors.
The Barings Europe Select fund, managed by Nick Williams, targets smaller European companies using a Growth at a Reasonable Price investment approach. Hargreaves Lansdown noted that European smaller companies may offer particular value if the current valuation gap narrows.
For investors seeking broad market exposure, the Legal & General European Index tracker fund provides access to 548 large European companies across sectors including financials, industrials, and healthcare. The firm suggested this low-cost option could serve as a foundation for long-term growth investing.
The sustainability of flows into European equity funds will likely depend on whether the economic and geopolitical factors identified by Hargreaves Lansdown continue to develop favorably. Investors will be monitoring economic data from the region and any shifts in political risk that could affect market sentiment in coming months.
