- Conflict in Middle East poses increased global economic risks due to inflationary pressures
- Europe's reliance on imported energy supplies means its economies are particularly exposed to fluctuations in the price of oil
- European markets enjoyed a strong performance in 2025, with ex-UK allocations for AJ Bell funds and MPS increased to between 4% and 16% in the year
- 2026 has seen a modest reduction, typically 1% to 6% across portfolios
- This rebalancing reflects narrowing valuation gaps and increased US exposure across underrepresented sectors
- Europe ex-UK remains a core diversification holding in AJ Bell portfolios
James Flintoft, head of investment solutions at AJ Bell, comments:
“Global markets have experienced instability due to conflict in the Middle East, with a fluctuating oil price impacting markets. Following strong performance and positive flows into European equity markets through 2025, we trimmed our allocations to the region in early 2026. Europe ex-UK remains an important source of global diversification, but valuations had moved and opportunities shifted as investors eagerly await the impact of government spending on defence and infrastructure.
“European equities delivered robust returns in 2025, with the Morningstar Developed Markets Europe ex-UK TME up 26.5% on a total return basis in sterling terms*, supported by attractive starting valuations, steadying inflation and favourable currency moves for sterling-based investors. This combination justified meaningful portfolio allocations across our funds and MPS.
“In January 2026 we reduced European ex-UK exposure, typically by 1% to 6% depending on the portfolio. The primary driver has been narrowing valuation differences with the US and stronger earnings momentum in American markets, particularly in sectors underrepresented in the S&P 500 such as Energy, Healthcare and Utilities. This is a rebalancing exercise, not a change in the long-term view on Europe.
“Since then, the conflict with Iran has raised global economic risks, especially for importers of energy such as Europe and the UK. This shifting situation has hit European equity markets hard over the last two weeks and left the market largely flat year to date.
“Europe ex-UK continues to offer distinct sector exposure through large global companies in pharmaceuticals, luxury goods, engineering and consumer brands. Whilst Europe ex-UK remains a core building block in our portfolios, it is important to acknowledge the risks and maintain diversification with allocations elsewhere.”
*Source: Morningstar Direct as of 31 December 2025