Valuation dispersion in 2025: Why quality growth is poised for a European comeback

The recent rotation into value and domestic stocks has created an extreme valuation dispersion between Value and Growth. Fund manager Mark Denham now believes this rotation is over-extended and we are observing Growth and Quality stocks trading at similar lows to 2021.

After underperforming U.S. equities for nearly two decades, European equities had a strong start of the year, signalling that the region could be entering a renaissance. This recent uptick has been pronounced by a strong rotation into domestic and value stocks, which has left quality growth companies with strong fundamentals and long-term earnings potential, trading at historically low valuations.

This has directly hurt FP Carmignac European Leaders which has a thorough philosophy of investing in quality stocks looking for profitable companies reinvesting for the future. Despite, this recent short-term underperformance, we stick to our philosophy and process and believe in a comeback in quality growth. When looking back into our past, we see similarities with 2022, the last big rotation from quality to value. While we underperformed during the reversal, sticking to our process enabled us to return double digit returns the following two years.

As monetary conditions stabilise and earnings visibility improves, confidence in forward cash flows is being restored. This backdrop supports multiple expansion, especially for high-quality companies with durable business models and pricing power, creating attractive entry points for long-term investors.

Since 2024 investors favoured European domestic stocks, particularly in banking, insurance, and industrials, as inflation remained sticky and interest rates elevated. Political instability in France and Germany, coupled with weak Chinese demand, US tariffs and Euro strength, weighed on sectors traditionally associated with “Growth”, such as technology, and consumer discretionary. The result was a divergence in performance: value led, while quality growth lagged, partially due to company fundamentals, but also macro and trade-exposure headwinds. We see that gap as cyclical, not structural.

We believe the rotation into value was underpinned by several factors:

Historical Inflation and ECB rates¹

Higher rates boosted banks’ profitability through wider net interest margins. The rise in interest rates above zero in Europe since 2022 boosted banks’ profitability through wider net interest margins. Domestic focused sectors such as Utilities and Telecoms, with no dollar exposure or tariff risk, were favoured.

In contrast, European growth companies with significant US exposure, which we can consider global leaders suffered from profit taking, as investors chased domestic names less exposed to the U.S. dollar.

Weakening US dollar and impact on exporters²

Year to date, the U.S. dollar has depreciated by over 10%, one of its sharpest declines in decades. This weakness has been driven by growing political, fiscal, and trade policy uncertainty under the Trump administration. The resulting currency move has acted as a significant headwind for European quality growth companies with substantial U.S. dollar revenues, compressing reported earnings and margins in euro terms.

Similarly, Tariffs have also been a disruption for European names with international exposure due to margin pressure, revenue risk, and subsequently investor sentiment. This has encouraged the relative attraction to domestic sectors.

At the stock level, Novo Nordisk has been our biggest detractor, down roughly 40%. The main issues for this company were:

• Loss of market share in obesity drugs, as doctors increasingly favour Eli Lilly’s Zepbound over Wegovy.
• Illegal compounders selling copy-cat versions of both companies’ drugs, taking share until recent bans.
• A CEO change, a cut to FY guidance, and a setback in their Alzheimer’s drug programme.

Despite these challenges, we believe the stock is now oversold. Only about 3% of eligible US adults currently use obesity drugs, which is far too low in our view. We also expect Novo’s competitive position to improve as they are likely to be first to market with an oral obesity drug by year-end.

In Healthcare, medical device companies such as Straumann (dental implants), Demant (hearing aids), and Alcon (eye lenses) fell 10–15%. Their earnings were held back by cautious consumer spending, but the underlying need for these products hasn’t changed, so we see this as delayed demand, not lost demand.

The Consumer sector also struggled. Export-exposed names like Adidas were among our weakest contributors, despite strong fundamentals, with record Q3 results and operating profit up 23% year on year.

With more scrutiny around Growth stocks we need to make sure we are getting more bang for our buck in terms of price paid for future prospects, and we have replicated our 2022 approach during similar conditions. We have strengthened positions and added new stocks that score well on our filters where market events have presented a natural entry point to scoop up oversold high-quality names. Overall, we have reduced our exposure to healthcare especially in Novo Nordisk, which we monitor closely, added new names in Financials especially in banks with names like BBVA which now filter positively in our screens and continued building positions in industrial names with names like Kion, SPIE, IMCD and Kingspan which are showing good valuations with secular growth prospects.

We believe Quality Growth companies defined by high return on invested capital, solid balance sheets, consistent earnings growth, reinvestment discipline, and durable competitive moats represent an attractive opportunity in the current environment.

Despite these attractive attributes, several of these great companies were penalised since 2024 due to macro and micro related headwinds and investors’ preference for domestic focussed and cheaper stocks. Yet, many of these names especially in healthcare, technology, and branded consumer goods have maintained or even improved their fundamentals. We believe this rerating is a good opportunity to build positions in companies that show a leadership position in their sectors globally at attractive valuation levels.

The STOXX Europe 600 trades at a forward P/E of 15x, compared to 22x for the S&P 500 a ~30% discount.

While much of the post-2023 recovery trade in Europe and globally has favoured domestic and value names such as banking and industrials, these sectors have already experienced multiple expansion and now trade closer to or above historical averages. In contrast, quality growth companies, with consistent cashflows, strong balance sheets, and structural earnings growth drivers have been left behind valuation-wise, despite maintaining earnings resilience through the macro volatility of 2024–25. With markets topping all-time highs, the continuation of growth is naturally a concern. However, we are well positioned to benefit from any move as companies with stronger balance sheets and pricing power are best placed to defend margins across different market scenarios, making them attractive into the next phase of the cycle.

Within Europe, the valuation gap between European quality growth and value stocks is now at multi-year extremes with quality growth names trading below historical averages, while value stocks have re-rated. This dislocation presents an opportunity, especially as earnings stabilise and macro risks fade.

P/E MSCI Europe Quality vs Value³

Several factors could trigger a rotation back into quality growth:

• Unchanged, strong business models: European quality companies have strong moats and business models with pricing power to withstand the current market environment.
• China stabilisation: Improved economic growth and renewed demand from China would benefit European exporters.
• Investor positioning: Europe remains under-owned globally, with over $150 billion in outflows since 2022.⁴
• Monetary easing: The ECB has already cut rates eight times, and more rate stability is expected from here, supporting growth-oriented sectors.

European markets offer numerous opportunities, including investing in undervalued European champions with strong international exposure and sectors likely to benefit from these catalysts.

• The electrification theme: With Germany’s fiscal stimulus and need to upgrade the grid, we are well positioned to capture this upside through domestic names as well as international players such as Siemens which has a 17% domestic revenue exposure to Germany, Schneider Electric, which has a strategic alignment to Europe’s energy trilemma (decarbonisation, security of supply and affordability) and SPIE, an active player across the electrification value chain, through building/infrastructure, grid and network services, e-mobility charging infrastructure and renewable integration. Prysmian is Europe’s leading provider of high-voltage cables and making them a key beneficiary of investment in upgrading infrastructure and improving interconnection between countries in Europe and elsewhere.
• AI beneficiaries: The data centre and AI investment boom is increasingly becoming a meaningful structural tailwind. ASML, the world leader in lithography is a direct beneficiary of AI-driven chip demand, with orders from global manufacturers like TSMC, SK Hynix, Intel and others, which gives us revenue visibility. We also see software names like SAP as AI beneficiaries that did not participate in the uptick seen in pure AI disruptive technologies. Over the medium term we expect the company to integrate AI applications into its dominant products and enhance revenue.
• Adding to high quality names: With the backdrop in quality names in favour of value stocks, it is now an opportunity for long term investors to build back positions in consumer staples healthcare and selectively in industrial names that are currently at valuations reaching their 10-year lows or have derated. We have therefore been building positions in names such as Beiersdorf, Sartorius, and Kingspan which demonstrate these traits of long term winners.

The recent rotation into value and domestic stocks has created a mirage. One that obscures the enduring strength of Europe’s quality growth companies. With valuations at historic lows and fundamentals intact, the stage is set for a comeback. Investors willing to look beyond short-term noise may find compelling opportunities in the very names that were left behind.