All set for a comeback

Amid the unrest, the tide may be turning for European equities.

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As we enter the second half of 2025, it is worthwhile taking stock of how key asset classes are performing to the year to date. The table above provides a comprehensive look across key asset classes represented in Australian investor portfolios. An underlying ETF represents the performance of the individual asset class, and 2024 returns provide some context.

Given everything that has been thrown at the markets in the first half of this year - tariffs/policy uncertainty in the US, US recession/China slowdown risks, geopolitical tensions (war in Middle East), rising US fiscal deficits/debt risks etc - all asset classes, barring a few, are enjoying another year of solid gains. Since uncertainty remains on many fronts - especially on US policies and tariffs - the bears call the gains this year "signs of investor complacency". The bulls will point to cooling inflation and improving consumer sentiment in the US and improving economic outlook in Europe (driven by improved outlook for investment expenditure in defence and infrastructure). How it all plays out remains to be seen, but we are betting on one asset class from the table to continue to do well over the next 12 months - European equities.

European equities are increasingly gaining favour among global investors at the expense of US equities. When we talked to several investors around the world and in the US, we are clearly noticing reduced confidence levels in US policymakers and increasing desire to diversify away from the US. We believe the outperformance of European equities relative to the US this year reflects this mood among investors. The question is whether this trend is sustainable.