Europe records historic capital inflows as investors reassess US exposure

Europe is witnessing record capital inflows, signalling a notable shift in global investment patterns after more than a decade of sustained US market dominance. 

According to recent reporting by the Financial Times, investors are reallocating capital toward European and emerging markets, a trend that is also being reflected in conversations with Maltese investors.

In an interview with BusinessNow.mt, Jordan Portelli, Chief Investment Officer at Calamatta Cuschieri Investment Management, said the move is being driven by a combination of geopolitical uncertainty, currency effects, relative valuations and shifting risk appetite.

“For the first time in many years, European equities outperformed their US counterparts last year. Since roughly 2010, US markets – particularly large-cap technology stocks – had enjoyed clear dominance, with companies such as NVIDIA, Microsoft and Alphabet forming the backbone of many global and Maltese portfolios. The artificial intelligence boom, especially NVIDIA’s rally over the past two years, further entrenched this exposure,” he said. 

However, heightened political and policy uncertainty has unsettled that comfort. The return of Donald Trump to the White House brought renewed tariff rhetoric and a more unpredictable trade stance, contributing to increased market volatility. Mr Portelli explained that investors who had long been comfortable holding US assets are now reassessing that positioning in light of policy-driven swings.

“A significant but often underestimated driver behind the capital shift has been currency movement. In 2025, the US dollar depreciated by approximately 12–12.5 per cent against the euro, materially affecting returns for euro-based investors,” he added. 

Mr Portelli illustrated that even if a US stock delivered strong gains in dollar terms, those returns were eroded when translated back into euros. 

“For European investors, this currency drag made US exposure less attractive relative to European equities, even without dramatic changes in corporate fundamentals. As a result, the relative performance gap between the two regions narrowed, encouraging diversification away from US-heavy portfolios.”

Beyond currency effects, Europe’s relative appeal has also been supported by fiscal developments. 

“Germany’s new administration has signalled significant spending initiatives, while broader European defence packages are expected to support industrial and infrastructure activity. These measures provide cyclical support, particularly to sectors such as banking and industrials, which are more heavily represented in European indices.”

However, Mr Portelli cautioned that these drivers are not structural game changers. The fundamental economic gap between the US and Europe remains intact, with US growth still exceeding that of the euro area.

“America’s agility in deploying capital toward innovation – particularly in artificial intelligence and advanced technologies – continues to distinguish it from Europe, which faces slower decision-making processes and regulatory complexity,” the Chief Investment Officer said.

He referenced recent competitiveness discussions led by former European Central Bank President Mario Draghi, noting that while reform proposals have been tabled, implementation has been limited so far. 

This, in Mr Portelli’s view, highlights Europe’s persistent structural challenges in translating policy ambition into tangible economic acceleration.

The shift in flows is not confined to Europe. Emerging markets have also attracted renewed investor interest, supported in part by the weaker dollar and improved growth dynamics in certain regions.

Mr Portelli pointed to India as a key example, with projected growth above 7 per cent and favourable demographic trends supporting consumption and labour-driven expansion. In contrast, China’s growth trajectory has slowed compared to its historic pace, while increased state intervention has weighed on investor sentiment in recent years. Although companies such as Alibaba remain accessible to international investors, capital allocation decisions are increasingly influenced by political and regulatory considerations.

In his assessment, India’s more facilitative stance toward foreign investment, combined with its expanding middle class and demographic advantages, gives it a competitive edge within the emerging market space.

Locally, Mr Portelli confirmed that investors are actively querying whether European exposure should form a larger share of their portfolios. At Calamatta Cuschieri Investment Management, exposure to US markets was gradually reduced earlier this year, with selective allocations redirected toward European and emerging market names.

Despite this tactical repositioning, Mr Portelli emphasised the importance of discipline over emotion. He observed that panic selling remains one of the most common and costly investor mistakes, as it often leads to exiting positions at unfavourable levels and failing to re-enter at the appropriate time. 

“Volatility, while uncomfortable, has become a persistent feature of markets since the COVID period and has intensified over the past two years.”

In his view, investors must clearly distinguish between temporary price swings and genuine fundamental deterioration. Where a company’s long-term prospects remain intact, periods of weakness can present strategic opportunities rather than signals to exit.

While Europe is currently benefiting from capital inflows and relatively lower volatility compared to the technology-heavy US indices, Mr Portelli does not interpret the shift as a decisive structural reversal. Europe may serve as a comparatively safer harbour in times of heightened uncertainty, yet its longer-term competitiveness still hinges on deeper structural reforms and improved agility.

The central challenge remains in balancing macroeconomic realities with portfolio resilience. Volatility should not automatically be equated with permanent loss; rather, it must be assessed within a broader strategic framework that separates short-term noise from long-term fundamentals.