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Over the past few weeks I’ve traveled through London, Edinburgh, Madrid, and Paris, visiting with government officials, policymakers, deal teams, and investors. My colleague Aidan Corcoran, who leads international macro, joined me for much of my journey across Europe. See below for details, but our bottom line is that the optimism from our trip in March has been tempered a bit, or at least it feels more measured on a relative basis, given how fast executive orders are being announced these days in China, the United States, and the Middle East relative to Europe. To be sure, there is no shortage of attractive investment opportunities in Europe, but political realities, regulatory considerations, and consensus thinking are acting as relative impediments in a world where the pace of change is surely accelerating.
EXHIBIT 1: European Valuations Relative to Earnings Growth Are More Attractive Than in the U.S.
Europe vs. U.S.: PEG Ratio, NTM PE/3-Year Forward EPS Growth
EXHIBIT 2: While European Public Market Investors Continue to Fret, Private Activity Has Been Strong
Europe: Take Private Transactions
That said, we still think that European risk assets are likely to continue their positive momentum in 2026, as Europe’s valuation gap relative to growth (Exhibit 1) and underweight positioning by the investment community are creating significant opportunities, especially on the private side, while the ECB’s policy impulse is now reaching the real economy, thus making financial conditions less restrictive.
Our Thoughts From The Road are as follows:
1. Europe’s earlier sense of unbridled optimism has given way to a more pragmatic reality.
During our meetings, policymakers and corporate executives alike struck a more pragmatic, restrained tone surrounding the ‘European renaissance’, a contrast to the optimism we encountered earlier in the year (see Thoughts From the Road: Europe and the Middle East). To be sure, Germany’s investment in Infrastructure and Defense should meaningfully unlock value and innovation, but messy politics in the region, especially as it relates to spending versus taxes, are adversely affecting momentum in countries such as France and the United Kingdom, and as a result, are likely deferring the growth impulse. Against this backdrop, we have revised our 2026 Euro Area GDP growth forecast to 1.1% from 1.3% (see below for details).
2. There are several key areas where European policymakers need to turn up the heat, we believe.
For starters, we learned that only about 40 of the roughly 400 recommendations in the Draghi report have — to date — been implemented. Meanwhile, AI capex is running at around $40 billion or so, about one tenth the pace we are seeing in the U.S. Higher energy costs — double in some European and U.K. sectors compared with the U.S. and the Middle East — are acting as a deterrent, and outside of France, we did not hear a clear rallying cry in this area. Maybe most telling, though, is that while Europe is making some progress in capital markets reform, the U.S. and other regions are moving just as quickly. As such, the gap has not narrowed in the way many had hoped.
3. That said, despite the slower pace of economic change, deal activity in the region has actually been quite robust.
The reality is that many of our biggest investment themes, including Security of Everything, Capital Heavy to Capital Light, and Productivity Enhancements/Worker Retraining have actually gained momentum amidst Europe’s more sluggish economic recovery. A common thread as we traveled around Europe was the need for private capital as companies look to reposition for growth and governments search for partners to fill sizeable funding gaps that have existed since COVID (Exhibit 7). Indeed, all told, this year KKR expects to hit $25 billion in new deployments in EMEA across our various strategies. Looking ahead, we left feeling optimistic about additional opportunities in Structured Equity deals, corporate carveouts, family-transition opportunities, and public-to-private transactions. Finally, Infrastructure activity in both core and large opportunistic deals remains above trend again heading into 2026.
4. Our visit across the region again reinforced our view that the periphery continues to outperform the core.
This is a theme Aidan has been emphasizing for some time, and one stock markets have now caught up to. All told, the periphery’s stocks have outpaced the core’s by over 100% since 2021. That’s a big number; yet, despite such strong outperformance of late, we see this trend continuing on a relative basis.
EXHIBIT 3: Europe’s Periphery Has Been Outperforming Since COVID
Real GDP: Selected Eurozone Countries, 1Q 2019=100
EXHIBIT 4: Stocks With Periphery Exposure Have Outperformed Those With Core Exposure by Over 100% Since 2021
Periphery Exposed vs. Core Exposed Stocks: Relative Performance, 2020=100
5. Unlike in the U.S. (where there is more debate about the easing cycle), there is an emerging consensus amongst policymakers and investors that the ECB’s easing phase has now run its course.
The June depo rate-cut to 2% likely represents the final move this cycle, with policymakers signaling increasing comfort that the ECB’s monetary transmission is functioning as intended, including financial conditions now being less restrictive. Meanwhile, inflation has normalized sharply, just above the ECB’s target, although fiscal expansion in parts of the bloc could introduce modest upside risk later in 2026, we believe.
6. Meanwhile, in the U.K., the conversation has shifted markedly towards fiscal policy and the government’s shrinking room to maneuver.
Since the Spring Statement in March, when the Chancellor, Rachel Reeves, appeared to preserve £10 billion of fiscal headroom, the outlook has deteriorated sharply. All told, a fiscal hole of roughly £20-30 billion is now expected in the fall, driven by anticipated productivity downgrades, higher gilt yields feeding through to debt-service costs, and several policy U-turns. Against this backdrop, the upcoming Budget will be a key test as the Chancellor works to deliver a credible path towards fiscal consolidation while balancing the government’s pro-growth objectives and political commitments.
7. During our visit we spent time with some of the leading family offices from around the world, who met with us in Paris to discuss key investment trends.
Our roundtable discussion, which was led by Alice Bush from our Family Capital Client Solutions team, highlighted a few things to us. First, this group of investors tend to think and invest like business owners: they are willing to lean into dislocation, and they appreciate KKR’s balance sheet alignment. Second, there was a lot of formal and informal discussion of upside productivity potential of AI from many, though there was a growing chorus that equity valuations as well as credit spreads linked to this thematic are now getting excessive. We remain optimistic about the future of the AI, but we stick to our view that counter-party high-grading is required at this point in the cycle. Additionally, while family offices have not changed allocations, most want to do more in Asia. We remain highly supportive of this regional re-allocation, given our view that it will run further and faster than many think. Europe and the U.S. were also cited as key areas of interest. Meanwhile, Liquid Credit and Cash were mentioned as the primary sources of funds to make these re-allocations. In addition, family offices are generally underweight Infrastructure, and as such, have begun to increase allocations to this asset class. Finally, Buyouts and other forms of Structured Equity were cited as potential areas of interest.
EXHIBIT 5: The Earlier Surge in Exports to the U.S. Has Now Fully Retraced
EU Exports to the U.S., EUR Billions
EXHIBIT 6: At the Same Time, Germany Has Seen a Sharp Pickup in Imports From China and Continued Pullback in Exports
China: International Trade with Germany, 3-Month Moving Average, US$ Billions
Looking at the big picture, we think several things stand out about the region. First, we think the key to Europe for allocators hinges on identifying the right themes and operational improvement stories, not relying on a major macro upswing in GDP. Indeed, given that Europe appears cheap relative to its growth, especially relative to the U.S. (Exhibit 1), we are not surprised to see deal volume accelerating. Importantly, this is unfolding at a time when most global investors are overweight the United States by 400–600 basis points in their portfolios. As such, the combination of an extremely favorable technical picture and a reasonable, albeit unspectacular, fundamental outlook likely means the direction of travel for markets is still higher in 2026.
So, where do we go from here? Of all the meetings we had in recent weeks, our conversations with government officials, CEOs, CIOs, and private sector investors across the continent, and especially in France, reinforced our highest conviction piece of advice: ‘Carpe Diem.’ Specifically, Europe collectively (i.e., both the public and private sectors in tandem) needs to create a more united financial services system, bolster its capital markets (i.e., rebuild a securitization market that attracts foreign capital), embrace more corporate sector reform in the private sector (e.g., take a page out of Japan’s playbook), fix its debt overhang, gain more technological expertise/lower its energy costs (Exhibit 8) and encourage consumption over savings. It also needs to communicate its story better to investors, given the ongoing blurring we are seeing between economics and national security.
The upside potential is actually quite substantial, we believe, as global investors are overweight the U.S. and are actively looking for reasons to diversify net new flows. The reality is that China under President Xi Jinping and the U.S. under President Trump are moving at near-warp speed. The blurring that we have been discussing for some time between national security and economics is now extending in both directions: the public sector is taking more stakes in private companies (e.g., Intel), while governments around the world are simultaneously offloading certain sectors, including Infrastructure, Space, and Defense to the private sector. We think Europe will need to act decisively to seize this critical moment to reform, restore fiscal discipline, and unleash a more dynamic private sector to avoid falling further behind. This will require a focus on both policy delivery and implementation.
EXHIBIT 7: Advanced Economies Have Seen Government Debt Ratios Swell by Around Six Percentage Points Since COVID, With the U.K., the U.S., and France Standing Out as the Most Aggressive Borrowers
Government Debt to GDP %: Percentage Point Change From 2019 to 2025
EXHIBIT 8: Europe Continues to Contend With an Energy Cost Structure Far Above That of Other Major Economies
Business Electricity Prices, USD/kWh, 2023 – 3Q25 Average
Looking at the bigger picture, our European trip reinforced our structural view that we are in a Regime Change, where heightened geopolitics, bigger deficits, a messy energy transition, and sticky services inflation all suggest a different kind of environment for investing. Against this backdrop, we are seeing a much more asynchronous global recovery, one defined by rolling recessions and rolling recoveries. This viewpoint represents a dramatic shift from prior decades where the U.S. consumer would lever up, spend, and reward the rest of the world, including Europe, with demand for its unique goods and services. Today, by comparison, we think that investors will need to ’make their own luck‘ by focusing more on operational improvement stories, turnarounds, and structures that leverage relative value across geographies and capital structures. Within Europe’s complex web of political and economic strains lies the opportunity, we believe.
