European Exceptionalism on Sale

European equities are often treated as the less exciting part of a global portfolio. The usual criticisms are familiar: weaker growth than the United States, more regulation, fragmented markets and less exposure to the world’s fastest-growing technology themes. Those concerns are not without merit, but they are not the whole story.

This paper focuses on three reasons why we believe Europe deserves renewed attention. First, the region contains a number of exceptional global businesses whose economics are often overlooked due to their European listing domicile. Second, the policy backdrop is becoming more pragmatic, with reform, simplification and capital markets integration moving higher up the agenda. Third, corporate buyers and private capital are increasingly acting on the value they see in European listed assets.

Valuation is part of the argument, but it should not be the whole argument. Europe’s lower market multiple partly reflects weaker aggregate margins, lower returns on equity and slower earnings growth than the United States. We believe the more interesting opportunity centres on identifying companies where the market may be applying a broad regional discount to businesses with global revenues, strong competitive positions and improving structural tailwinds.

At the end of June 2026, the MSCI Europe Index¹ traded at 15.0x forward earnings, compared with 21.0x for the MSCI USA Index². That gap is meaningful, but it matters most where it is attached to companies whose fundamentals are stronger than the regional label implies. In our view, that is where careful, dedicated stock pickers can find attractive opportunities.

Exhibit 1: MSCI Europe: Global Revenue Exposure, Regional Valuation Discount
Global Exposure, European Valuation

Source: Bloomberg, FactSet, MSCI, as at 31 July 2026. Revenue exposure reflects Bloomberg geographic revenue exposure data for MSCI Europe constituents, with “overseas” referring to revenues generated outside companies’ domestic markets. Valuation comparison shows MSCI Europe sector one-year forward P/E multiples relative to corresponding MSCI US sector multiples. Data are based on index constituents and analyst estimates and are subject to revision.

Global Companies with European Addresses

Some of Europe’s best companies are genuinely global franchises, making this much more than simply a story about buying a cheap market.

A leading European luxury group, for example, may be listed and headquartered in Europe, but its customer base is global. Its value is not derived from European gross domestic product (GDP) growth alone, but from brand heritage, pricing power, distribution, product desirability and the ability to serve wealthy consumers across the United States, Asia, Europe and emerging markets. The same logic applies in health care, where certain European companies have built global categories through intellectual property, clinical expertise, manufacturing scale and trusted relationships with health care systems around the world.

The broader pattern extends across parts of European aerospace, industrial technology, semiconductors, software and financial infrastructure. These companies are not all dependent on domestic European demand. Many benefit from deep engineering expertise, long product cycles, high switching costs, regulated market positions, global customer relationships and mission-critical products. Their competitive advantages are often durable, but their shares can still be valued within a discounted European market framework.

The opportunity is not to buy Europe indiscriminately, but to find global businesses whose listed address may be influencing investor perception more than their actual revenue exposure or competitive strength would justify.

Exhibit 2: MSCI Europe Has Global Revenues, but Still Trades at a Discount

Source: Bloomberg, FactSet. Analysis by Templeton Global Investments. As at June 30, 2026.

MSCI Europe generates 58.7% of revenues overseas, while most sectors trade below comparable US sectors on one-year forward price-to-earnings (P/E) multiples. The valuation gap should be interpreted alongside differences in margins, returns and earnings growth, but it highlights the opportunity where global fundamentals may be stronger than the regional multiple implies.

A More Pragmatic Policy Backdrop

The second reason to revisit Europe is that the policy backdrop is becoming more supportive. The perception that held for years that Europe was more interested in regulation than competitiveness may be beginning to shift.

The Draghi report on European competitiveness, published in September 2024, helped focus policymakers on Europe’s need to improve productivity, investment and scale. The European Commission’s Competitiveness Compass, published in January 2025, builds directly on that work and sets out priorities around innovation, competitiveness and reducing strategic dependencies.

This matters because Europe starts from a position of heavy bureaucracy, fragmented capital markets and complex cross-border rules. Even modest progress could therefore have a meaningful effect. Reducing frictions would not make Europe identical to the United States, but it could improve returns for companies and make the region more attractive to both domestic and international capital.

The Commission is now targeting a reduction in administrative burdens of at least 25% for all businesses and 35% for small and medium-sized companies, with an expected saving of €37.5 billion by 2029.³ It has also presented a series of simplification measures across multiple sectors. These changes will take time, and implementation will not be uniform, but the direction is important.

Capital markets reform is another part of the story. Europe has significant household savings, but too little of that money finds its way into productive equity investment. The Savings and Investments Union is designed to connect European savings more effectively with companies that need capital, with the Commission citing Draghi’s estimate that Europe needs an additional €750 billion to €800 billion of investment per year by 2030.⁴ A deeper European capital market could have several significant upsides, including improved liquidity, support for innovation and reduced reliance on overseas capital markets for high-quality European companies.

Takeovers Show the Discount Is Being Noticed

Perhaps the strongest evidence that Europe is “on sale” is the flurry of recent corporate activity. Strategic buyers and private capital are increasingly looking at European listed companies and seeing value that public markets have been slow to recognise.

The recent examples span airlines, industrial automation, logistics, real estate, consumer goods and financial infrastructure. Some involve private capital seeking to acquire undervalued public assets, while others involve strategic buyers looking to gain scale, strengthen market positions or acquire specialist capabilities that would be difficult to build organically. The breadth of activity matters more than any single transaction.

Acquirer-region data add useful context. European buyers remain the largest source of deal value in completed or pending European transactions, but overseas buyers also represent a substantial pool of capital. North American acquirers alone account for significant deal volume, with additional participation from Asia-Pacific, the Middle East and other regions. This should not be presented as evidence of a year-on-year acceleration in non-European buying without additional data, but it does show that external capital is already active in the market for European corporate assets. Taken together with the recent deal list, it reinforces the point that strategic buyers and private capital are willing to act where public markets may still be applying a regional discount.

On Bloomberg’s acquirer-region cut, European buyers account for 58% of completed or pending European deal value, while acquirers from outside Europe represent a meaningful additional pool of capital, accounting for more than 40% on the same category-share basis.

Exhibit 3: European Merger & Acquisition Regions

Source: Bloomberg. Completed or pending European deals by acquirer region. Percentages are Bloomberg category shares and may not sum to 100.

Not every deal should be viewed in the same way. Some UK examples are mainly evidence of cheap public-market valuations and the relative depth of overseas capital pools. Some continental European examples fit better with the theme of consolidation, scale and industrial logic. But taken together, they send the signal that corporate buyers are already acting on the idea that valuable European assets are available at attractive prices.

This supports the broader investment case. If public markets continue to apply a broad regional discount to European-listed companies, strategic acquirers may increasingly see an opportunity to buy assets, brands, technology and infrastructure at valuations that do not fully reflect their long-term value.

What Could Go Wrong

Nonetheless, clear risks remain. Europe can move slowly, national politics can delay reform, and some industries remain heavily exposed to regulation or energy costs. Individual companies also face their own challenges, from competitive pressure and weaker end-market demand to cyclical pressure in industrial markets.

That is why we are not making a blanket argument for every European stock. Aggregate valuation alone is not enough. The case is more selective and depends on identifying undervalued companies with durable competitive advantages, global revenue exposure and a credible route to value recognition, whether through earnings delivery, reform benefits, capital market change or corporate interest.

The Investment Takeaway

Although Europe has certainly not solved all its structural problems, we believe our case for European equities is based on the premise that the market may still be applying too broad a discount to a region that contains world-class businesses, improving policy momentum and rising corporate interest from buyers.

European exceptionalism is about exceptional companies being priced through a regional lens that may no longer fully reflect their global economics, rather than a claim that Europe has become perfect. As policy announcements move into implementation and corporate activity continues to build, an interesting backdrop has emerged: global businesses, European listings, a more pragmatic reform agenda and increasing evidence that strategic buyers are already paying attention.