Have you ever wondered what it feels like to catch a wave just as it’s about to crest? That’s the vibe in the investment world right now, particularly with European investment trusts. Halfway through 2025, markets have been a wild ride—think trade wars, geopolitical curveballs, and policy shifts that could make anyone’s head spin. Yet, amidst the chaos, one sector is shining brighter than a sunny day in Paris: European investment trusts, especially those focused on small caps. They’ve surged by a jaw-dropping 24% in the first half of the year, leaving other markets in the dust. So, what’s fueling this rally, and more importantly, can it keep going? Let’s unpack the story.
The Rise of European Investment Trusts
The first six months of 2025 have been nothing short of a rollercoaster for investors. From unexpected policy moves to global trade tensions, markets have had to dodge more curveballs than a seasoned pitcher. Yet, investment trusts—those pooled investment vehicles that trade like stocks—have managed to deliver. On average, trusts (excluding venture capital trusts) have climbed 7% since January, which is solid given the turbulence. But the real stars? European trusts, particularly those diving into smaller companies, which have skyrocketed by 24%. Large-cap European trusts aren’t far behind, posting a respectable 17% gain.
Europe has become a magnet for investors looking to diversify away from the US, with small caps leading the charge thanks to their untapped potential.
– Financial analyst
Why the love for Europe? Investors are rethinking their heavy bets on the US, where uncertainty looms large. From tariff threats to ballooning national debt—pegged at a staggering $37 trillion—confidence in the world’s largest economy is wobbling. Meanwhile, Europe’s markets, long overlooked, are suddenly brimming with opportunity. It’s like finding a hidden gem in a thrift store: undervalued, but with serious potential to shine.
Small Caps: The Heart of Europe’s Surge
Let’s zoom in on European small caps. These companies, often nimble and domestically focused, have been the darlings of 2025. They’re up 24% in just six months, outpacing nearly every other sector. Over the past three years, they’ve gained 53%, and over a decade, they’re up a whopping 174%. What’s driving this? For starters, small caps are trading at a steep discount—some analysts estimate as much as 20% below their fair value. That’s a bargain hunter’s dream.
Historically, small caps commanded a premium due to their superior earnings growth. But today, they’re trading cheaper than during the global financial crisis or the Covid-19 shock. Why? A mix of factors, from lingering economic uncertainty to investors’ obsession with big tech. Yet, as one portfolio manager put it, this “dislocation” doesn’t make sense based on fundamentals alone. Smaller companies are leaner, more adaptable, and often tied to local economies, which shields them from global trade drama.
Small caps are like the underdog team that suddenly starts winning. They’re overlooked, undervalued, and ready to run.
– Investment trust manager
Lower interest rates are another tailwind. Small caps, being more sensitive to borrowing costs, thrive when rates drop. With inflation cooling and central banks easing, these companies are poised to benefit from cheaper capital and stronger consumer demand. Add in regional stimulus—like Germany’s push for infrastructure—and you’ve got a recipe for growth.
UK Commercial Property: A Comeback Story
Across the Channel, UK commercial property trusts are staging a comeback. After years of struggle—think weak consumer sentiment and a sluggish property market—the sector has roared back, gaining 18% in the first half of 2025. This follows a rough patch, with a 16% loss over the past three years. So, what’s changed? Falling interest rates have eased pressure on property valuations, while strong rental growth and a spike in mergers and acquisitions (M&A) have added fuel to the fire.
It’s not all rosy, though. The sector’s long-term performance remains uneven, with only a 21% gain over five years. Still, for investors willing to stomach some volatility, UK property trusts offer a compelling mix of income and growth potential. I’ve always found property to be a bit like a slow-cooker recipe—it takes time, but the results can be deeply satisfying if you get the ingredients right.
- Rental growth: Strong demand for commercial spaces is pushing rents higher.
- M&A activity: Consolidation is creating opportunities for savvy investors.
- Interest rate relief: Lower rates are boosting property valuations.
China and Beyond: Emerging Markets Shine
While Europe’s stealing the spotlight, other regions are also making waves. Greater China trusts, for instance, have climbed 15% in 2025, a stark contrast to their 11% decline over three years. What’s behind this turnaround? A mix of recovering consumer confidence and policy support in China has helped. Still, the region’s long-term performance—down 6% over five years—reminds us that emerging markets come with risks.
Then there’s Japan, up 12% this year, and global emerging markets, also up 11%. These regions are benefiting from the same trend: investors pulling money out of the US and spreading it across the globe. It’s like diversifying your wardrobe—you don’t want to wear the same outfit every day, especially when it’s starting to fray.
| Sector | H1 2025 | 1 Year | 3 Years |
| European Small Caps | 24.41% | 22.95% | 53.44% |
| UK Commercial Property | 17.94% | 22.29% | -15.73% |
| Greater China | 14.60% | 25.07% | -10.93% |
| Japan | 12.28% | 14.43% | 42.10% |
Why Investors Are Ditching the US
The US has long been the go-to for investors, but 2025 is telling a different story. Policy uncertainty, particularly around trade tariffs, has rattled markets. A temporary 90-day tariff pause ends soon, and if harsh measures return, we could see another sell-off. Add to that a new US bill pumping trillions into tax cuts and spending, and the national debt is ballooning—potentially by another $3 trillion. Yikes.
Investors are responding by pulling cash out of US equity funds—£622 million in May alone, according to recent data. Meanwhile, European equity funds saw inflows of £435 million. Why? Europe’s got infrastructure spending, defense investments, and a renewed focus on domestic growth. It’s like the continent is finally stepping out of the US’s shadow.
The US market’s dominance is being questioned, and Europe’s ready to take the stage.
– Market strategist
Can Europe Keep the Momentum?
Here’s the million-dollar question: can Europe’s hot streak last? On one hand, the region’s valuations still look attractive, especially for small caps. Analysts see “modest upside” for large caps but bigger potential in smaller companies, which could benefit from a rerating as investors catch on to their value. Falling interest rates and regional stimulus are also in Europe’s favor.
But it’s not all smooth sailing. Trade tensions, particularly between the US and EU, could throw a wrench in the works. If tariffs escalate, European markets could take a hit. That said, small and mid-cap companies, with their focus on domestic revenues, might dodge the worst of it. As one fund manager noted, these businesses are “insulated” from global trade woes, making them a safer bet in uncertain times.
- Valuation discounts: Small caps offer significant upside potential.
- Domestic focus: Less exposure to global trade risks.
- Stimulus support: Infrastructure and fiscal policies boost growth.
How to Play the Trend
So, how do you get in on the action? First, consider diversification. Spreading your investments across European small caps, UK property, and even emerging markets can balance risk and reward. Second, keep an eye on interest rate trends. If central banks continue to ease, sectors like property and small caps will likely keep climbing. Finally, don’t ignore the risks—trade wars and geopolitical shocks could derail even the best-laid plans.
In my experience, investing is a bit like planting a garden. You need to pick the right seeds (sectors), nurture them with care (research), and be patient for the harvest. European trusts, with their current momentum, might just be the seeds to sow in 2025.
Final Thoughts: A World of Opportunity
As we navigate the second half of 2025, the investment landscape feels like a chessboard—full of strategic moves and unexpected twists. European investment trusts, particularly those focused on small caps and UK property, are proving to be the knights and bishops of this game. They’re agile, undervalued, and ready to capitalize on shifting market dynamics. But like any good chess player, you’ve got to think a few moves ahead. Will trade tensions ease? Can Europe sustain its growth? Only time will tell, but for now, these trusts are a compelling piece of the puzzle.
Perhaps the most exciting part is the chance to diversify beyond the US, which has dominated portfolios for years. By exploring Europe, China, and other emerging markets, you’re not just chasing returns—you’re building a more resilient portfolio. So, what’s your next move?
