A shift is taking place across European markets, as countries previously written off are quietly moving ahead of the historical stalwarts of Europe. While the core economies of France, Italy, Germany, and Sweden—what we call the FIGS—are today’s laggards, many of the once-struggling periphery countries, then known as the PIIGS during the Eurozone crisis, are now soaring ahead. In this piece, we dive into this overlooked shift and assess where the best investment opportunities may lie.
Europe hasn’t been winning many fans lately. Recent headlines have been dominated by chaos in France’s elections, an autos crisis in Germany, and geopolitical tensions rattling investors. Even once-reliable stocks like ASML and LVMH haven’t been immune to the turbulence. It's easy to feel overwhelmed by the barrage of bad news, but despite this, we’re now more excited about Europe than ever.
Firstly, this is because small and mid-caps are as cheap relative to large caps as they have been this century – more about this here. Secondly, Europe isn’t just one monolithic, legacy economy; it’s a collection of diverse markets, each with its own dynamics. And while France and Germany’s challenges might dominate sentiment (they represent c.40% of the benchmark), much of the rest of Europe is quietly thriving. Spain, Portugal, and Ireland are leading the charge, fuelled by structural reforms and renewed investor interest.
So, while the headlines may paint a gloomy picture, Europe’s market diversity is alive and well, offering exciting opportunities for those willing to look beyond the most obvious markets.
FIGS falling this Autumn
The FIGS as we have coined them—France, Italy, Germany, and Sweden— perhaps with the exception of Italy, once stood tall as the pillars of Europe’s economic strength. But these heavyweights are now facing unexpected headwinds, causing their economies to stumble.
Germany, Europe’s industrial titan, has seen its manufacturing heartland slow, and weakened export demand is putting pressure on its economy. The energy crisis, triggered by the Russia-Ukraine war, has further strained Germany’s growth prospects, leaving its transition away from Russian gas in a difficult spot. France is still reeling from snap elections earlier in the summer that has left it with a weak government dealing with a mounting debt pile. Italy remains weighed down by massive public debt and an aging population. Despite some signs of recovery, sluggish productivity and slow reform efforts are holding back Italy’s potential for growth. Sweden, traditionally a stable performer, is now dealing with a housing market slowdown and inflation concerns. Rising interest rates have cooled economic activity, and high household debt is adding further pressure.
But all is not lost – there is hope in yesterday's underdogs.
PIIGs can fly
In the aftermath of the Eurozone crisis, few would have bet on the economic resurgence of Europe’s periphery. Countries like Ireland, Spain, Portugal, and Greece—once considered the weakest links in the European Union—were struggling with soaring unemployment, shrinking GDPs, and crippling debt. Fast forward to 2024, and the narrative has shifted dramatically: Europe’s periphery has not only rebounded but, in many cases, outperformed the core economically.
Ireland, in particular, has become one of the EU’s standout performers, consistently ranking at the top of GDP growth charts. By 2025, Ireland’s GDP is set to expand by 3.6% - well ahead of the EU at 1.6%. Spain, too, has bounced back strongly, with GDP growth rates consistently outpacing those of France and Germany.
As the core European economies face slower growth, labour market challenges, and stricter regulatory environments, the former "underdogs" of the Eurozone are showing what economic resilience looks like. With their renewed competitiveness, favourable investment climates, and dynamic growth, Europe’s periphery has transformed from a cautionary tale to a model of recovery and prosperity.
Capitalising on Europe’s housing divide
The Eurozone crisis hit the periphery hard, with the housing market taking the biggest blow. Ireland’s once-thriving Celtic Tiger crumbled as property prices plummeted nearly 50%, erasing homeowner equity and devastating the construction sector. Spain fared only slightly better, with prices collapsing by 30%.
Indexed house prices (March 2008 = 100)
But all wasn’t lost. In the years since, these economies have rebuilt themselves brick by brick—and the housing markets have followed suit. In Ireland, tech-driven job growth and a tight housing supply have fuelled soaring property prices, while Spain’s real estate market has surged, thanks to a recovering economy and international demand.
As Northern European markets have cooled recently, Ireland and Spain emerged as housing market stars. The contrarian play worked. Our holdings in Cairn Homes (Ireland) and Spanish builders Aedas and Neinor Homes capitalised by scooping up land at rock-bottom prices post-crisis. Now, with strong returns locked in and solid execution, these companies are delivering impressive gains for shareholders—outperforming even the top homebuilders in Northern Europe.
Indexed total returns (Jan 2021 = 100)
This rebound story shows that yesterday’s losers can become today’s winners, proving once again that taking a bet on an underdog can pay off handsomely.
Role reversal: Unearthing value in Northern Europe’s housing market
As the PIIGS soar, we've turned our attention northward, seeking hidden gems in Northern Europe’s beaten up housing markets. Sweden, in particular, has taken a hard hit. Years of low interest rates fuelled a property boom, but when inflation surged and interest rates spiked, the market faltered. Prices dropped, demand slowed, and high household debt became a problem.
Yet, in this downturn lies opportunity. Sweden’s housing market, while battered, is still built on strong fundamentals—robust infrastructure, economic stability, and a growing population. Many residential real estate companies are trading at deep discounts to book value, even as the market shows signs of stabilising. For those willing to go against the grain, Sweden’s housing sector could offer substantial upside as it recovers.
Always something to do in Europe
Europe’s ever-shifting economic landscape can be a treasure-trove for savvy investors. While some countries struggle, others surge, creating pockets of opportunity for active stock-pickers. Whether it’s Spain’s resurgent housing market or Ireland’s tech-fueled boom, Europe’s diverse economies ensure that there’s always value to be found. In uncertain times, those willing to look beyond the obvious can capitalise on regions and sectors that the broader market overlooks.
This article was written by Pras Jeyanandhan, Manager of the VT Downing European Unconstrained Income Fund.
Risk warnings: Please note that past performance is not a reliable indicator of future results. Capital is at risk. Investments and the income derived from them can fall as well as rise and investors may not get back the full amount invested. Investments in our funds should be held for the long-term and are higher risk compared to investments solely in larger, more established companies. Opinions expressed represent the views of the fund manager at the time of publication, are subject to change, and should not be interpreted as investment advice.
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