Europe’s HALO effect:

08 October 2026

• During an eventful few months, geopolitical developments have reinforced some themes we’ve been following, while our thinking on others has evolved as circumstances have changed.


• From AI and defence to electrification and consumer spending, we examine some of the latest developments that could have important implications for how investors position their portfolios.

Headlines over the summer were challenging for Europe. Hope for resolution in the US-Iran conflict peaked at the start of July, with oil prices falling close to USD 70 per barrel before rapid re-escalation took prices back above USD 100^*, reigniting inflation fears. Political instability has increased in France and Germany, with centrist parties and candidates floundering in opinion polls coinciding with rising borrowing costs.¹ The UK has a new prime minister but faces the same old problem of growing spending and weak growth. Intensifying Chinese competition in some of Europe’s oldest industries and the rapid development of AI disrupting others have added another layer of uncertainty and volatility in equity markets.

Despite this, we continue to identify opportunities in European companies whose earnings have become more resilient, supported by their pricing power and exposure to critical and long-term capital expenditure cycles. Europe’s economic leadership is also becoming more dispersed. Several of Europe’s smaller economies, including Spain, Greece and Ireland, are showing stronger underlying growth than the region’s largest economies, while Greece’s latest tax-cut announcements underline how much its position has changed since the sovereign debt crisis.² Increasingly, the domestic European investment opportunity extends well beyond the traditional Germany/France/UK centre.

We continue to favour ‘HALO’ (Hard Asset, Low Obsolescence) industries - companies and industries that we believe are becoming increasingly critical to sovereignty, security and economic resilience within a more multipolar world. This theme recognises the more volatile, capital-intensive and strategically fragmented reality that Europe and the world face. That is difficult for parts of Europe but good for companies with scarce physical assets, pricing power and low AI obsolescence risk.

Europe’s China shock and resilient industries

The threat from Chinese competition continues to disrupt Europe and is expanding into new areas. Volkswagen’s latest profit warning and plans for around 50,000 additional job reductions³ show the pressure on Germany’s automotive model.⁴ The challenge now extends to commercial vehicles. At September’s IAA Transportation exhibition in Hanover, BYD unveiled its ETT 44 electric heavy truck⁵, alongside an expanded European product range. Chinese luxury brands such as Laopu Gold are challenging the assumption that European heritage guarantees a lasting advantage with Chinese consumers.⁶ This has been worsened by a new challenge for Louis Vuitton, which won a trademark infringement battle against a local tea company, triggering a consumer backlash that appears to have exacerbated an existing slowdown in sales.⁷

Europe is starting to respond more forcefully. The new steel regime cuts tariff-free import quotas by 47% relative to the 2024 framework and doubles the duty on imports above quota to 50%.⁸ We see a potential improvement in the competitive environment for European steel producers, including ArcelorMittal. Chemicals and plastics are already attracting calls for further trade protection, while pressure is building to address Chinese hybrid vehicles.⁹ We are on the lookout for more tangible steps by the EU to protect other industries, although it remains a tough balance. In cars, Germany has been cautious about more extensive Chinese import tariffs due to its large Chinese customer base. In chemicals, the very high energy costs in Europe ultimately can only be fixed with a more effective energy policy.

Despite this doom and gloom over Chinese competition, we still see durable barriers to entry for many of Europe’s largest industries. Civil aerospace is one of Europe’s clear global winners, perhaps because of its heavy reliance on regulation and safety, one of Europe’s great specialisms. Defence procurement is increasingly inward looking, as Europe looks to de-emphasise US procurement and build up local industry. This can be seen in the flourishing European defence start-up environment, with companies like Helsing commanding multi-billion-dollar valuations.¹⁰

In other sectors, local service networks and installed equipment bases can also make industrial suppliers difficult to displace, particularly relevant for some of Europe’s niche mid-cap industrials. In our strategies, we continue to favour civil aerospace, defence and industrials where high barriers to entry insulate from Chinese disruption.

 

Chinese competition and Europe's steel response

Reported car-market penetration alongside a tighter steel import framework

 

AI: Enablers, winners and losers; disruption continues

July produced a slump for the ages in AI enablers (semiconductors and electrification). On some measures this was the sharpest positioning unwind since 2009, exacerbated by crowded, overleveraged positioning and elevated valuations.¹¹

Share prices have since stabilised and started to recover through the end of the summer and we now see some incremental positivity that could give fresh energy to the AI trade.

One of the main questions in July was ‘what is the next use case?’, after the surge in agentic coding use supported the initial excitement this year.

We think there is further evidence that usage is broadening out in three areas:

1. Consumer agents, exemplified by September’s launch of Muse by Meta.¹²
2. Cybersecurity, supported by companies terrified of being hacked and damaged by AI.
3. Significant opportunity for further enterprise adoption, which remains at a very early stage.

This has been validated to some extent by continued rapid acceleration in annual recurring revenue from Anthropic and OpenAI.¹³

At the same time, the disruption debate has moved beyond the ‘SaaSpocalypse’¹⁴, IT services, market data and classifieds. Agents that compare prices, negotiate contracts and switch providers could weaken businesses that benefit from customer inertia. Recent concerns around the ability of Muse, the personal AI agent Meta launched in September¹⁵, to call up your phone or insurance company to negotiate better prices drove a selloff in insurance, telecoms and utilities, three sectors that have been previously uncorrelated, demonstrating the growing risk of new thematic disruption.¹⁶ We believe AI disruption is here to stay and the winners and losers keep changing. Some SaaS businesses have staged a remarkable comeback (eg SAP, Salesforce, ServiceNow) while others have deteriorated further.

AI: a shifting investment landscape

AI winners and losers keep changing: today's winners can become losers, and today's losers can become winners

 

Currently, we see the most obvious beneficiary of AI implementation in Europe to be in the banking sector. These are organisations with large workforces and human-driven processes that AI can streamline and drive cost reductions (see our “European Banks: The New AI Winners?” blog from July 2026). It would, however, be naïve to say banks are guaranteed winners. There is also a risk that deposit competition increases due to the growing use of AI agents that can take action on customers’ behalf, such as switching accounts for them, rather than just flagging better savings rates available at other banks, an area we are monitoring closely.

In our view, a clear way to mitigate AI disruption risk is to focus on ‘HALO’ businesses. These are companies that AI (at least for now) has been unable to disrupt that exist primarily in the physical world. For us, that’s not just the AI enablers, but other heavy metal industries like steel, materials, capital goods and aerospace and defence.

European companies are better-placed to face inflation than in 2022-23

An energy-led inflation shock is particularly uncomfortable for Europe due to its heavy reliance on imported energy. Imported oil and gas raise costs, reduce household spending power and complicate monetary policy.¹⁷ Consumer businesses that raised prices substantially after the pandemic are now finding customers less willing to absorb another increase due to weaker household balance sheets leaving them exposed to cost of goods sold inflation. We are wary of consumer exposure, avoiding most consumer-exposed areas apart from airlines, where we see significant pressure from higher fuel costs already priced to a large extent into stocks.

The 2022-23 inflation cycle gave many industrial companies valuable experience in repricing contracts and protecting profitability. Thus far, many of the industrial companies we favour see inflation in energy and freight costs as manageable, given their much more robust pricing power and contractual inflation protection.¹⁸ Although rates place pressure on long-duration investments like utilities, infrastructure and defence, we think many of these programmes are so critical to Europe’s survival that they will continue despite higher financing costs. The way we see it, countries simply have to find other ways of balancing the books.

Operating margins of selected European sectors 2021-24

Beyond AI: Growth emerging elsewhere?

With half an eye on 2027, we see scope for investment cycles to broaden beyond just AI into areas where Europe has substantial industrial expertise. As we wrote about in March 2026, (see our “Oilfield Services and Middle East conflict” blog),  the Strait of Hormuz closure and damage to infrastructure could support significant offshore oil and gas development and repair programmes. These are areas served by Europe’s world-leading oilfield services companies. Meanwhile, in our view, any recovery in Venezuelan investment remains conditional on policy, financing and execution. Elevated oil prices alone do not guarantee that projects will be approved.

We believe that trade-route resilience is another source of demand. DP World’s agreement in principle to develop two new terminals on the UAE’s east coast provides a concrete example of investment outside the Strait of Hormuz.¹⁹ Konecranes offers exposure to port equipment, automation and maintenance.²⁰ In our view, strong earnings in parts of shipping may also support vessel and marine investment.²¹

Air and missile defence, including protection against low-cost drones, could sustain another phase of procurement in Europe and the Middle East beyond some of the areas that have been placed in doubt by modern warfare like land vehicles. This has been supported by recent large orders for air defence systems and new cheaper anti-drone capabilities like BAE Systems’ APKWS missiles attached to fighter aircraft.²²

We think the electrification theme remains well underpinned by multi-year agreements and extends beyond AI and data centres. European grid network operators like Elia, E.ON and National Grid are undertaking generational investments to modernise and improve grid resilience and reduce transmission costs²³, which go well beyond AI. We also see a resurgence in renewables and offshore wind, which has been through a tricky period after Donald Trump’s re-election. Underinvestment in areas like installation capacity could create an attractive supply/demand mismatch in a few years which could benefit companies like Cadeler.

We continue to see attractive, long-term investment opportunities providing compelling ‘all-in return’ propositions across a diversified set of sectors that play to Europe’s strengths.

Tom O’Hara, David Barker and Jamie Ross manage European Equities strategies at GAM Investments. You can find out more information on the team here.