Capture growth investment opportunities in Europe in 2026

Fidelity European Trust plc (LON:FEV) portfolio managers Sam Morse and Marcel Stötzel explain why they see continued opportunity in Europe in 2026. They outline how resilient business models and disciplined valuation enable the portfolios to navigate an evolving macro environment and elevated market expectations.

Outlook for the strategy in 2026

European equity markets have demonstrated remarkable resilience this year, supported by accommodative monetary policy, attractive relative valuations, and a gradual improvement in investor sentiment towards the region.

To move the market on from here, Europe has the potential to close its productivity gap with the US, by focusing on technology and innovation, as well as by simplifying business regulations. The Draghi report has outlined a roadmap to do this, though we acknowledge that progress towards greater European integration is likely to be slow.

European companies are not simple proxies for Europe’s domestic economy, with roughly two-thirds of European corporate revenues generated outside the region. This global footprint has long provided a powerful tailwind. If domestic Europe – the remaining one-third of revenues – also begins to contribute more meaningfully amid an improving regional outlook, it could unlock a material additional source of upside.

That said, investors are anticipating an improvement in European companies’ earnings growth (from zero in 2025 to double digit in 2026!) driven by interest rate reductions, fiscal stimulus (particularly in Germany) and a view that ‘the worst is over’ in terms of tariff news flow. The reality, however, is that the tariff impact (15% vs. the historic level of 2%) is about to hit and stubborn inflation will limit the ECB’s ability to offset with meaningful interest rate reductions. The benefits of any fiscal stimulus will be offset somewhat by rising long bond yields. Sentiment is bullish so markets are set up for disappointment, be it Germany back-sliding on fiscal commitments, or geopolitical instability.

As such, we remain cautious regarding markets especially given high valuations and bullish sentiment. The good news is that defensive quality is not so expensive now on a relative basis: the yield on the portfolio is approaching the market yield.

Europe continues to offer attractive prospects, especially for those who take a selective approach to identify quality companies with resilient business models, trading at attractive valuations. The team’s focus on capital preservation, sector diversification, and stock selection positions the fund to navigate these varied scenarios while maintaining focus on the long-term outperformance objective.

How is the portfolio positioned against this backdrop?

Our investment philosophy has not changed and is anchored in driving returns primarily through stock selection, maintaining a long-term perspective and preserving capital in tougher markets. The portfolio remains balanced in terms of sector positioning and the focus is on finding attractively valued companies with good long-term prospects for cash generation and dividend growth. Positioning is driven by opportunities at the individual stock level rather than by macro developments, as the team prefers to focus on the areas where Fidelity have a competitive advantage, namely bottom-up fundamental analysis. Macro exposure is managed by ensuring broad balance across sectors and limiting sector bets to within +/-5% of the benchmark, seeking to identify the best opportunities within these areas.

Our positioning remains aligned with our long-term philosophy: we seek to invest in companies with faster dividend growth, higher returns and more sustainable payouts than the broader market. Historically the fund trades on a 5-15% premium to the market in dividend yield terms, reflecting the higher quality bias and stronger dividend growth of portfolio holdings. Today we are closer to 5%, so we are arguably at an attractive entry point for the fund on a relative basis.

Higher rates and extreme factor rotations have been a headwind for high-quality, stable-growing, strong balance-sheet businesses – the very companies we tend to favour. Today, many trade at valuations far closer to the market than their historical norms. We have been adding selectively to names where we believe the long-term fundamental drivers remain intact but shorter-term cyclical or sentiment issues have created attractive entry points. Examples include ASML, Dassault Systèmes, and Symrise, where near-term disappointment, cyclical weakness or market narrative shifts have overshadowed robust long-term cash-flow and dividend-growth potential.

One of the most meaningful shifts in the portfolio has been a measured increase in exposure to domestic European revenue streams, reflecting improved structural momentum around fiscal investment, integration and competitiveness reform. We have expressed this theme through additions such as Veolia, Ryanair, Inditex, and selected banks, aligning with our bottom-up framework and valuation discipline.

We remain cautious on German cyclicals, where recent share price rallies in some names have been disconnected from underlying revenue exposure, with “postcode” rather than fundamentals driving flows. France is our largest overweight at the country level, but we do not have much exposure to domestic-heavy names. Instead, we hold global players with limited French exposure. Political uncertainty has created tactical buying opportunities, and we’ve added selectively.

We also see several attractive themes that support our holdings going into 2026. The portfolio is positioned to benefit from technological innovation, particularly artificial intelligence, through names such as ASML, Legrand, SAP and Dassault, as AI moves deeper into industrial and enterprise workflows. Meanwhile, high-quality names like TotalEnergies should benefit from energy transition & infrastructure renewal

We are confident in the investment process and the ability to protect investor capital on the downside. This will be achieved by continuing to focus on a combination of quality and value and by continuously revisiting the investment thesis on stocks to evaluate what assumptions are discounted in share prices. The combination of a bias towards higher quality businesses than the market discounts and the team’s valuation discipline has provided lower drawdowns than the market in tougher times.

Fidelity European Trust PLC Past Performance (%)
	Nov 20 – Nov 21	Nov 21 – Nov 22	Nov 22 – Nov 23	Nov 23 – Nov 24	Nov 24 – Nov 25
Net Asset Value	21.5%	1.0%	10.7%	6.9%	13.1%
Share Price	19.7%	3.2%	9.0%	4.6%	23.3%
FSTE World Europe ex-UK Index Total Return	15.7%	-2.9%	10.3%	8.2%	23.8%
Past performance is not a reliable indicator of future returns.   Source: Morningstar as at 30.11.2025, bid-bid, net income reinvested.   ©2025 Morningstar Inc. All rights reserved. The FSTE World Europe ex-UK Index Total Return is a comparative index of the investment trust.

Important information

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Past performance is not a reliable indicator of future returns. Overseas investments are subject to currency fluctuations. The Fidelity European Trust PLC uses financial derivative instruments for investment purposes, which may expose it to a higher degree of risk and can cause investments to experience larger than average price fluctuations. The shares in the investment trust are listed on the London Stock Exchange and their price is affected by supply and demand. The investment trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser. Investors should note that the views expressed may no longer be current and may have already been acted upon.

The latest annual reports, key information document (KID) and factsheets can be obtained from our website at www.fidelity.co.uk/its or by calling 0800 41 41 10. The full prospectus may also be obtained from Fidelity.  The Alternative Investment Fund Manager (AIFM) of Fidelity Investment Trusts is FIL Investment Services (UK) Limited. Issued by FIL Investment Services (UK) Limited, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0126/416079/ISSCSO00263/0726

Fidelity European Trust PLC (LON:FEV) aims to be the cornerstone long-term investment of choice for those seeking European exposure across market cycles.