Thoughts from the Road: Europe

As with past trips to this region, there is no material change to our long-held view that Europe’s aggregate economic growth is likely to remain modest. Indeed, outside of the post-COVID stimulus-driven bounce, economic optimism around a sustained step-function increase in growth has never really been our macro call on Europe at KKR. We believe allocators waiting for a broad European renaissance to feel comfortable investing are asking the wrong question. The better question, we think, is where structural changes within the region are creating differentiated earnings growth and durable cash flows. 

Increasingly, that opportunity lies beneath the surface, which is one of the reasons we continue to get even more local in the region (including most recently opening our Milan office, which brings our total number of offices globally to 29). To this end, we note the following:

1. First, dispersion within Europe are widening at a time of negative dispersion sentiment surrounding Europe at large. From our vantage point at KKR, we see compelling structural tailwinds across defense, retirement and savings, health and wellness, experience-led consumption, and digitalization. In several of these areas, revenue and earnings growth increasingly resemble what we are seeing in stronger parts of the U.S. and Asia. On the other hand, traditional economic engines in Europe such as autos, energy-intensive manufacturing, and parts of Real Estate remain under pressure, a trend we expect to continue. Our bottom line: Consistent with our Divergence Conundrum thesis (see Mid-Year Outlook for 2026), Europe is not moving as one economy, and investors should not allocate to it as though it is.
2. Our trip also reinforced that structural changes are helping the region absorb external shocks far better than in 2022. More diversified energy sourcing, expanded LNG infrastructure, greater storage capacity, and increased renewable generation have improved Europe’s ability to absorb volatility. Consider that German wholesale power prices averaged approximately €465 per megawatt hour during the fourth quarter of 2022; today, they are closer to €97. Europe still has less flexibility than the U.S. to look through energy inflation, but the region is much better positioned than it was several years ago (which is why we think that both central bankers and sell-side forecasters have often been too quick to make the recession call).
3. Third, Europe is becoming an increasingly important market for private capital as it transitions from Capital Heavy to Capital Light. There are two catalysts that feel more ‘present’ than in the past. First, corporates are under greater pressure to simplify portfolios, improve returns on invested capital, and reposition businesses for a higher-cost-of-capital environment. Second, governments now face rising demands to finance defense, energy security, digital infrastructure, and supply chain resilience at a time when public balance sheets are already stretched. Both trends point to a larger role for Private Equity, Infrastructure, Credit, Insurance capital, and Structured Solutions to meet the growing opportunity to create value through operational expertise, flexible capital, and long-duration investment. See below for details, but the smoke signals from the corporate sector this trip were clearly to find more ways to transition their businesses from complexity into simplicity.
4. All eyes are on Germany and the U.K. To date, the fiscal impulse around Germany has been slow to materialize. That said, Germany has announced one of its most comprehensive reform packages in decades, and our local teams are now telling us that investment has begun to accelerate across semiconductors, AI infrastructure, and venture capital. See below for details, but if Germany can successfully execute on this agenda, we believe the benefits could ultimately extend well beyond its own borders, supporting investment, productivity, and capital formation across much of Europe. Meanwhile, in the U.K., we await policy details from newly appointed Prime Minister Andy Burnham, with the possibility of reinvigorating the investment agenda (particularly private sector capex/infrastructure, given the fiscal constraints).

What all this means for portfolio construction. Against this macro backdrop, we continue to find a home for Europe in portfolios, including KKR’s Balance Sheet, which today holds 29% of its assets in the region. We fully appreciate that it is more controversial to advocate for European allocations these days (especially to local Europeans). However, variant perception matters in investing, and the reality is that, as Exhibit 1 shows, if we use the Euro Stoxx as a proxy for regional performance, Europe has bested most markets for some time more than enough to justify the risk (and this does not even assume an investor drilled down and allocated to the right themes). Some of this performance surprise is about fundamentals, but some of it reflects how overly cautious sentiment has been towards investing in this region of late. We also take comfort that as we look ahead, European earnings streams are increasingly diversified, as global markets become increasingly correlated to a ‘market of one’, which we define as the combination of AI and Financial Services. One can see this in Exhibit 3.

EXHIBIT 1: Despite Negative Sentiment, European Risk Assets Have Actually Been Performing Quite Well

Total Return (USD terms) (Indexed to 100 in July 2021)

EXHIBIT 2: While the Periphery Labor Markets Have Rebounded Well, the Core Still Needs to Regain Its Momentum

Select Eurozone Countries: %Point Change in the Unemployment Rate Since December 2021

EXHIBIT 3: Unlike Many Other Parts of the World, European Earnings Growth Is Becoming More Broad-Based

European Sectors: 2026/27E Consensus EPS CAGR

Many of Europe’s traditional economic engines remain under pressure. Autos, for example, continue to face increasing competition from lower-cost Asian manufacturers. Meanwhile, low nominal GDP growth continues to weigh on parts of the Real Estate market, and coalition governments across the region often struggle to implement reforms at the pace investors would like. Against this backdrop, my colleague Aidan Corcoran’s multi-year thesis that the “European periphery is poised to outperform the core this cycle” has exceeded even our expectations. This is shown in Exhibits 2 and 4, respectively.

EXHIBIT 4: Importantly, the Periphery Is Not Just Outperforming the Core on Better Employment Trends. Fixed Investment Patterns Show a Similar Bifurcation

Gross Fixed Capital Formation (2022=100)