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Europe’s investment appeal

Europe
Alternatives
Infrastructure
Real Estate
ESG

20/11/2024

The investment routes to express European Transformation

Maria Milina

Research Analyst

Michael Lewis

Head of Research, ESG

Murray Birt

Senior ESG Strategist

Dirk Schlüter

Co-Head, DWS House of Data

Richard Marshall

Head of Infrastructure Research

reben bos headshot

Ruben Bos

Head of Real Estate Investment Strategy

Headshot image of Michael Verhoeven

Michael Verhoeven

Product Specialist

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IN A NUTSHELL

  • Europe has been at the forefront of sustainability policies for years, illustrated by rapid decarbonization and the deployment of renewables. Europe also leads on most dimensions of economic inclusion and social progress.
  • The U.S. election, the continuation of the Russia-Ukraine conflict and broader geopolitical and strategic risks simply fuel the impetus for Europe to transform and unlock capital investment to finance transformation.
  • Action such as public-private finance partnerships to de-risk and scale-up breakthrough technologies as well as regulation to make it easier for start-ups and small to medium-sized enterprises (“SMEs”) to access capital markets demonstrate this transformational agenda.
  • We view Alternatives as the best route to capture transformative investment opportunities. Alternatives occupy a place in the risk-return spectrum between traditional lower-risk rates and investment grade credit on the one hand and risky equities and high yield credit assets on the other.
  • One of the most attractive asset classes within Alternative is infrastructure, which now forms around 20% of assets under management in European alternatives. We expect its appeal to continue given European infrastructure has three crucial benefits relative to other regions namely policy, diversity, and value.
  • Real estate investment is pivotal in supporting Europe’s transformation and can play an important role in achieving economic, social, and environmental goals. Structural drivers for the asset class include Europe’s aging population, increasing healthcare spending and advancements in artificial intelligence.
  • Similarly, private investments via direct lending offer investors a unique chance to finance SME transformation. Given the floating nature of direct lending loans, the prospect of further monetary easing in Europe should, in our view, provide an additional fillip to this asset class.

 

Introduction

In this paper, we explore the case for Europe as an investment location. We show how the policy and regulatory environment across the continent is increasingly being tilted to address structural challenges such as weak competitiveness as well as towards unlocking capital investment to finance sector transformation. We then delve into the characteristics of Alternatives as an asset class. Finally, we assess specific investment opportunities within the infrastructure, real estate, and direct lending sectors.  

1 / Europe as an investment location

Europe has long been a leader in sustainability policy, but the re-election of U.S. President Trump, with his commitment to trade tariffs, poses a significant risk for Europe. Additionally, ongoing geopolitical risks, including Russia’s invasion of Ukraine, further drive the need for European transformation. Major issues were identified, and recommendations made in important reports from former Italian Prime Minister Letta[1] and former European Central Bank President Draghi.[2] These reports echo the findings and efforts of DWS from our European Transformation initiative since December 2022.

1.1 Europe’s strong environmental and social credentials

Europe stands as a global success story in sustainability and social inclusion, two of the world’s most critical issues. Europe has more ambitious climate targets compared to the U.S. and China, i.e. a 55% reduction from 1990 levels by 2030,[3] compared to the U.S.’s 50-52% reduction from 2005 levels, which translates to about 43-45% from 1990 levels,[4] and China’s target focuses on peaking emissions prior to 2030 and improving carbon intensity.[5]

Since 1990, Europe has seen its greenhouse gas emissions decline by 33.9% or -1.2% on a compound annual growth rate (CAGR). This compares to a CAGR decline of just 0.1% CAGR in the United States and a rise of more than 3% for China and India.[6] When it comes to the adoption of renewables, Europe has achieved 44% of its power generation stemming from this source.[7] The equivalent share in the United States is just 23%. Europe also leads on most dimensions of economic inclusion and social progress, including income inequality and life expectancy.[8] The missing piece to the region’s appeal as an investment location is the continent’s performance in terms of economic growth and productivity. This has become a central pillar of the European Commission’s efforts to addressing the region’s competitive position.

1.2 Decarbonization, digitalization and defense are Europe’s key priorities

Three strategic priorities to address Europe’s competitiveness were well summarized in the recent report by a former Italian prime minister Mario Draghi: Europe needs to digitalize and decarbonize the economy and increase its defence capacity.[9] Digitalization should address Europe’s productivity problem, fostering innovation and efficiency. Decarbonization is crucial not only for meeting ambitious greenhouse gas (GHG) targets but also for transitioning to secure low-cost clean energy sources. In an era of rising geopolitical tensions, reducing dependencies and increasing security by diversifying suppliers of critical raw materials and minimizing reliance on imported digital technology should strengthen Europe’s resilience and strategic autonomy.

European Transformation Europe`s Investment Appeal

Watch Michael Lewis, Head of ESG Research speak about our latest report: European Transformation and Europe’s Investment Appeal

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Europe’s investment appeal
Click here to download the full article
1

European Commission (April 2024) Enrico Letta’s Report on the Future of the Single Market

2

Report by Mario Draghi for European Commission (September 2024) Future of EU competitiveness

3

European Commission (September 2020) Communication on the 2030 Climate Target Plan

4

Congressional Research Service (January 2023). U.S. Greenhouse Gas Emissions Trends and Projections from the Inflation Reduction Act

5

Climate Action Tracker (September 2024). Countries – China

6

European Commission (2023). JRC Science for policy report. GHG emissions of all world countries

7

EDGAR (October 2024). JRC Science for policy report. GHG emissions of all world countries 2024

8

McKinsey Global Institute (January 2024). Accelerating Europe: Competitiveness for a new era

9

Report by Mario Draghi for European Commission (September 2024). The future of European competitiveness

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