MEGA Returns: Europe at a Strategic Inflection Point

After years of being overlooked in global portfolios, Europe may finally be entering a new era—one not of quiet recovery, but of structural transformation. The catalyst? A confluence of geopolitical realignment, policy awakening, and long-overdue fiscal mobilisation.

Are long-suffering investors set to be rewarded by a new MEGA trend – Make Europe Grow Again - or perhaps, as we are hoping for, to Make Europe Generate Alpha!

We recently brought our European fund to Tyndall Investment Management, and the timing could not be more opportune. Our bias toward small and mid-cap companies has been challenged over the past few years, as this segment underperformed by 30–40% on a rolling 3-year basis. But we believe the tide is turning. Structural shifts are underway that could meaningfully support this part of the market, particularly in Germany as well as the broader Eurozone.

From Draghi’s Diagnosis to Fiscal Awakening

In late 2024, Mario Draghi delivered a blunt assessment of Europe’s economic position:

“For two decades, the leading actors in European integration have been asleep at the wheel... The status quo cannot hold any longer. Only bold reforms will successfully end the Union’s economic malaise.”

At the time, there was little political appetite for such reforms. But political winds can shift quickly. Following President Trump’s return to the White House in early 2025—and a particularly difficult diplomatic meeting with Ukraine’s President Zelensky—Europe appears to have been jolted into action.

Germany, long fiscally cautious, is now leading the response. The newly elected Chancellor, Friedrich Merz, invoked Draghi’s most iconic phrase - “Whatever it takes” - when he unveiled a sweeping fiscal package worth up to €800 billion, targeted national defence and critical infrastructure.

To put that figure in context: the post-WWII Marshall Plan amounted to approximately €120 billion in today’s money. That programme reshaped the European economy for a generation. Merz’s stimulus, if delivered, could do the same.

For investors, the implications are profound. Germany—Europe’s largest economy and one of the world’s most fiscally conservative—is now embarking on a multi-year investment cycle. The potential multiplier effects are significant, particularly for small and mid-cap industrials embedded in regional value chains.

Europe’s Once-in-a-Generation Reset

Beyond Germany, Europe more broadly is pivoting toward strategic autonomy in defence, energy, and technology. We see the following as critical developments:

Defence Integration: The EU has launched a €150 billion defence loan programme with “Buy European” conditions attached—laying the groundwork for a continent-wide defence industrial base.

Energy Independence: Massive investment is flowing into renewable energy, battery production, electrical infrastructure as well as more conventional gas-powered plants.

Onshoring Supply Chains: From semiconductors to critical minerals, governments are backing domestic manufacturing to mitigate the vulnerabilities exposed by recent global shocks.

Germany’s willingness to lead marks a departure from decades of reticence. By unlocking fiscal capacity, especially through relaxing its strict debt rules, it is helping shift Europe away from stagnating growth. German fiscal expansion alone could lift GDP growth significantly over the next decade.

Small and Mid-Caps: The Overlooked Beneficiaries

While large caps have already begun to rerate on the back of liquidity flows, we believe the most compelling opportunities lie further down the market-cap spectrum.

German ‘Mittelstand’ companies - high-quality industrials with specialised expertise - stand to benefit directly from increased infrastructure and defence spending.

Many SMID-cap companies are domestically focused, with limited exposure to global tariffs and geopolitical risk, making them well-positioned for a more inward-facing European investment cycle.
Valuations in this segment remain attractive, and investor positioning remains light after years of underperformance.

Europe’s recovery will not be uniform. Policy tailwinds will favour specific sectors and value chains, particularly those aligned with national investment plans and EU strategic goals. We believe the winners of recent years are unlikely to be winners from Europe’s pivot. Large caps with international earnings and complex supply chains are now unnervingly exposed to tariffs and increasingly uncertain geopolitics.

Active managers can add meaningful value in this environment by identifying companies which are aligned to new, domestically-focused capital flows.

As Europe embarks on what could be a structural shift in its economic trajectory, we believe the outlook for SMID caps in particular is increasingly attractive.

We have highlighted some of the ways we are playing Germany’s defence and infrastructure surge in the appendix to this note. These are names that are not widely held in European peer funds, despite being exposed to surging capital flows – a unique opportunity we believe.

What began as an acronym borrowed from across the Atlantic - Make Europe Great Again - has taken on new, and perhaps more appropriate, meanings. Make Europe Grow Again or perhaps wishfully for us, Make Europe Generate Alpha! The message is the same: Europe is no longer asleep at the wheel.
This is not a rally driven by sentiment or liquidity alone. It is grounded in structural policy shifts, fiscal mobilisation, and the hard lessons of recent history. For investors with a long-term view and a willingness to look beyond the usual suspects, Europe may be on the cusp of something truly MEGA.

Contact Details:
Fund Manager: Pras Jeyanandhan – [email protected]
Fund Manager: Mike Clements – [email protected]
Head of Distribution: Theresa Russell – [email protected]

Appendix – our plays on the German fiscal surge