摩根士丹利-绘制欧洲杠铃式投资格局 Mapping Europe's Barbell 3Q 2026

BIGPICTURE

MappingEurope’sBarbell

BIGPICTURE|3Q2026

Europeisundergoingitsmostsignificanteconomicpolicy

shiftsincethecreationoftheeuro.Afterdecadesinwhich

economicpolicyprioritizedfiscalrestraint,globalizationand

marketefficiency,eurozonegovernmentsareprioritizing

economicsecurity,strategicautonomyandindustrialresilience.Thisismorethanmerelyincreasedpublicspending.Capitalisbeingreallocatedtodefense,energyanddigitalinfrastructure,advancedmanufacturingandcriticaltechnologies.

Forinvestors,Europeisdirectingcapitaltowardareassystematically

underinvestedformuchofthepost-ColdWarera.Itslongstandingproblemsofweakproductivity,unfavorabledemographics,expensiveenergyand

institutionalfragmentationremain,butthedirectionofpolicyandcapitalallocationhaschangedsufficientlytocreateadifferentinvestment

opportunityset.

DISPLAY1

EuropebyRegion

France

Lithuania

Poland

Czech

HungaryRomania

Croatia

Serbia

Greece

DenmarkNetherlandsBelgium

Britain

Germany

Slovenia

Italy

Ireland

Switzerland

Austria

Portugal

Spain

Norway

Sweden

Finland

Iceland

Estonia

A

AUTHOR

JITANIAKANDHARI

DeputyCIO,Solutions&Multi-AssetGroupPortfolioManager,

PassportEquity

HeadofMacro

&Thematic

Research,EmergingMarketsEquity

2MORGANSTANLEYINVESTMENTMANAGEMENT|BIGPICTURE

WESTERNEUROPE

TheEndoftheOldModel

Germanyisthecatalystforthis

transformation.Inthe1990s,Germanywasdubbedthe“sickman”ofEurope,asreunificationprovedfarmorecostlythananticipated,saddlingthenew

economywithuncompetitiveindustry,risingunemploymentandchronicfiscalstrain.Themodellookedbroken.

TheHartzlaborreformsof2003–

2005underChancellorSchröder

helpedGermanyemergefromthe

post-reunificationmalaisethrough

wagerestraint,industrialreformandthecompetitiveadvantagesconferredbytheeuro.

Germanybecamethemodelof

disciplined,export-ledcapitalism:lowdebt,currentaccountsurplusesandamanufacturingbaseofunparalleledquality.Itspost-ColdWarsuccess

restedonthreepillars:inexpensiveRussianenergy,insatiableChinese

demandforcapitalgoodsandan

Americansecurityumbrellathat

alloweddefensespendingtoremainminimal.Germanywentfromthesickmantoanindispensableengineof

Europeangrowth.Thatmodel

provedextraordinarilysuccessful.

Itisnowfractured.

ThewarinUkraineexposeda

fundamentalmiscalculation:the

eliminationofbaseloadnuclear

capacity,asinsufficientinvestmentsingridandstorageandstructural

dependenceonRussiangasasthe

marginalpricesetterleftEuropean

industrywithelectricitycosts

materiallyhigherthanintheU.S.or

China.EuropeanUnion(EU)electricitypricesarestillanacutecompetitive

handicap.Eurozoneindustrialoutputis3%belowits2021levelandchemicalscapacityisdown9%since2022.China’sevolutionfromcustomertocompetitorhasbeenequallyconsequential.

Chinesedemandplateauedasits

manufacturerslearnedtobuild

whatGermanyoncehadamonopolyonsellingtothem.TheAmerican

securityumbrellaisbeingheldupforrenegotiationbyanadministration

thatviewsburdensharingintransactionalterms.

Whileenergysecurityandsanctions

dominatedtheimmediateresponse

toRussia’sinvasionofUkrainefrom

theEU,ledbyGermany,thepolicy

agendahasbroadenedconsiderably.ItisnowcenteredonreducingstrategicdependenciesonRussianenergy,

ChinesesupplychainsandAmerican

technology,whilestrengthening

industrialresilience.TheconsequenceisahistoricchangeinGermanfiscal

policy.Thecountryisabandoningfiscalorthodoxyinfavorofa€500billion

investmentininfrastructure,defense,energyresilience,industrialcapacity

anddigitalsovereignty.Because

GermanysitsatthecenterofEurope’sindustrialecosystem,itstransformationisreshapinginvestmentpriorities

acrossthecontinent.

Germanythereforemattersbeyond

itsequitymarket.Itsfiscalpivotis

potentiallythetransmissionmechanismforabroaderEuropeanCapEx(capitalexpenditure)cyclespanningindustrials,power,defense,construction,

automationanddigitalnetworks.

Francepresentsthesharpestcontrastbetweenindustrialstrengthand

macroeconomicfragility.Itsfiscal

positionisconcerning:adeficitabove

5%,pensionreformthattriggeredthecollapseoftwogovernmentsandthe2027presidentialelectionlooming

withcrediblepathsforboththefar

rightunderMarineLePenanda

resurgentleftcoalition.Neitherwouldpursuefiscalconsolidation,arguing

forstock-levelselectivityratherthanbroadFrenchequityexposure.

France’sindustrialchampionsin

defense,aerospace,electrificationandindustrialautomationarebeneficiariesofEuropeanrearmament,AI

investmentandtheenergytransition.TheFrenchdefensebudgetissettorise13%in2026and11%in2027,

backedbyanewsix-yearprogramcreatingmulti-yearrevenuevisibility.France’snuclearfleet,thelargest

inEurope,givesitanenergycostadvantage,asdatacenterdemandacceleratesandbaseloadpowerbecomesacriticalresource.

TheopportunityinFranceisnotwiththecountryitself;itisinspecific

companies.Morebroadly,France

illustratesanimportantdistinction

forEuropeaninvestors:sovereignrisk,domesticmacroeconomicconditionsandcorporatefundamentalsneednotallpointinthesamedirection.

TheremainingWesternEuropean

economiesoffermoretargeted

opportunities.TheNetherlandsis

hometoASML,thesoleproduceroftheextremeultravioletlithography

equipmentonwhicheveryadvancedsemiconductordepends.Switzerland,outsidetheEUfiscalframeworkandinsulatedfromeurozonepolitical

risks,offersexposuretoindustrialandhealthcarechampions,withtheaddeddefensivecharacteristicsofahard

currencybalancesheet.

BIGPICTURE|MORGANSTANLEYINVESTMENTMANAGEMENT3

NORTHERNEUROPE

Power,DefenseandDigitalInfrastructure

TheNordiceconomiesenteredthis

cyclefromapositionofstrengththat

mostofWesternEuropecannotmatch.Fiscalpositionsaresoundandlabor

marketsareflexible.ProximitytoRussiahasconcentratedpoliticalattentionondefenseandenergysecurity,translatingdirectlyintoindustrialinvestment.

Sweden’sNATOaccession,andFinland’sandtheBaltics’borderswithRussia,havemadetheregion’sdefenseindustrial

basesignificantandunlockeddomesticpoliticalconsensusforsustaineddefensespending.SwedenandDenmarkplantoincreasedefenseexpendituretomore

than3%ofGDPby2030.

Beyonddefense,theNordics’

combinationofcheaprenewablepower,coldclimatefornaturalcoolingand

politicalstabilityisattractinghyperscalerdatacenterinvestmentatscale.More

than90%ofelectricitygeneration

inNorwayandSwedencomesfrom

low-carbonsources.WiththeAI-driveninvestmentcycleincreasinglyconstrainedbytheavailabilityofpower,theregion’senergyabundanceisbecomingan

economicassetratherthansimplyanenvironmentaladvantage.

Norway’ssovereignwealthfund,the

largestintheworld,alsoprovidesa

stabilizingfiscalbackdropthatinsulatestheregionfromthesovereigndebt

pressuresfeltinSouthernandWesternEurope.ItsGovernmentPensionFundGlobalhasassetsofroughly$2trillion,makingittheworld’slargestsovereignwealthfund.

IrelandistheoutlierinNorthernEurope.Itsinvestmentstoryisnotaboutdefenseorenergy,butratherpharmaceutical

manufacturing,technologyservices,thedeleveragingofitscreditcycleanditsroleasaU.S.multinationaltaxdomicile.Apple,

Google,MetaandMicrosoftallhave

significantoperationsinIreland,makingitmoresensitivetoU.S.corporatetax

policyanddomesticcreditthanEuropeangeopoliticaldynamics(Display2).

Britain,thesecondlargestequitymarketinEurope,alsoillustratesthewideninggapbetweendomesticmacroconditionsandglobalcompetitiveness.Itseconomyfacesgenuinestructuralheadwinds:

anemicproductivitygrowth,constrainedfiscalheadroomandahousingmarketthatlimitslabormobility.Butthe

investmentopportunityisinglobal

industrialchampions.Britain’sdefenseindustrialbaseisamongthemost

capableinNATOandbenefitsdirectlyfromthecommitmenttoraisedefensespendingtoward2.5%ofGDPand

beyond.TheopportunityforBritain,likeFrance,liesinselectedglobalchampionsratherthanbroadindexexposure.

DISPLAY2

ADecadeofEuropeanBankDeleveraging

Privatenon-financialdebt/GDPfrompeaktocurrent

240%-24%

215%

164%-27%

137%

-29%

57%

-261%

234%

208%

-115%

116%119%

lrelandSpainU.K.GreeceltalyEurozonePolandGermanyFrance

DeclinefrompeakpercentagePeakprivatenon-financialdebt/GDPCurrent(Q42025)

400%

350%

300%

250%

200%

150%

100%

50%

0%

-31%

154%

86%

185%

-32%

97%94%

-75%133%

-40%126%

377%

137%

Source:BankforInternationalSettlement.Asof12/31/2025.

4MORGANSTANLEYINVESTMENTMANAGEMENT|BIGPICTURE

SOUTHERNEUROPE

FromPeripherytoGrowthEngine

Countriesthatspentthe2010sunderInternationalMonetaryFund(IMF)

programsenduringbrutalausterityandcapitalflight,namelyGreece,PortugalandSpain,havefullyrecoveredand

outgrownthecoreEurozoneeconomiesinthepost-pandemicera.Several

appearpositionedtosustainthat

outperformanceintothenextdecade.

Thecountriesatthecenterofeurozonecrisisspentmuchofthelastdecade

deleveragingprivatedebt,rebuildingexternalbalancesandrecapitalizing

banks.Asaresult,theyenteredthe

currentexpansionwithmorefiscal

andfinancialflexibilitythantheircorecounterparts,anextraordinaryreversalofpre-2012dynamics.

Spainisthecontinent’smost

compellingmacrostory.GDP

growthhasconsistentlyoutpaced

theeurozoneaverage,drivenbya

combinationoffactorsthatareunlikelytoreversequickly:immigrationfrom

LatinAmericahasboostedlabor

supplywithoutthesocialintegration

complexitythatcharacterizesmigrationfromotherregions,meaningfully

improvingSpain’sdependencyratio

relativetoGermanyandFrance.NextGenerationEUfundabsorptionhas

beenamongthehighestinEurope.

Servicesdiversification,particularly

technologyandtourism,hasreducedtheeconomy’svulnerabilityto

manufacturingcyclevolatility.Spain’srenewablesbuildouthasalsocreatedagenuineenergycostadvantagerelativetoNorthernandCentralEuropean

industrialcompetitors.

Portugal,ItalyandGreecefollow

similarpatterns.Deepdeleveraging

hascreatedroomforrobustlendinggrowth.EUstructuralfundabsorption

providesavastpipelineofinvestmentrelativetoeconomicsizethatfew

regionsgloballycanmatch.Banking

sectorsthatwereexistentiallystressedin2012arenowamongthemost

profitableintheeurozone,benefitingfromrisingnetinterestmarginsandimprovingcreditquality(Display3).

Greecewaswrittenoffasan

investmentdestinationformostof

thepastdecade,butitnowoffersa

combinationofimprovingfiscalmetrics,withEUfundinflowsequivalentto

approximately10%ofGDP,tourism-drivenservicesgrowthandabankingsectorthathasbeencomprehensivelyrestructured.Theinvestmentgraderestorationhasservedasacatalyst.

TheinvestmentstoryinSouthernEuropeisoneofhealthierbalancesheets,improvingcreditcreation,favorablerelativegrowthandlargepublicinvestmentpipelines.

DISPLAY3

ThePeripheryLeadsGrowth

NominalGDPinSouthernEuropehasoutpacedthecorethisdecade

RelativeGDP-1Q2021=100

Periphery

Core

Jul-25Jan-26

160%

150%

140%

130%

120%

110%

100%

Jan-21

Jul-22

Germany

Jul-23

Ireland

Jan-23

Greece

Jul-24

Portugal

Jan-22

France

Jan-24Italy

Jan-25

Spain

Jul-21

Source:Haver.Asof1/31/2026.

BIGPICTURE|MORGANSTANLEYINVESTMENTMANAGEMENT5

EASTERNEUROPE

Europe’sNewIndustrialFrontier

IfSouthernEuroperepresentsEurope’smacroeconomicreversal,Eastern

Europerepresentsitsindustrialone.

Industrializationisshiftingeastward

andEasternEuropestandstobe

oneoftheprincipalbeneficiariesof

Europe’sstrategictransformation.TheregionofferswhatWesternEurope

increasinglycannot:competitive

energycosts,skilledengineering

labor,availablefactorycapacityand

geographicproximitytothedefense

supplychainsthatNATOisurgently

rebuilding.Asenergy-intensiveGermanindustrycontracts,theproduction

baseismigratingeast,while

intellectualpropertyandengineeringleadershipremaininGermany.

2026issettobeayearofsubstantialEUfundinflowsintoCentralEurope,drivenbyacombinationofthreekeyfactors.First,memberstatesfacethedeadlinefordeployingRecoveryandResilienceFacility(RRF)resources

beforetheprogramexpires.Second,

theEU’snewSecurityActionfor

Europe(SAFE)initiativefordefense-

relatedinvestmentisinplace.Third,

absorptionofcohesionfundsfromthe2021–27budgetcycleisgathering

pace.Together,theseprogramsshouldprovideoneofthestrongestimpulsestheregionhasexperiencedforalongtime.Foryears,EasternEurope’scaserestedonafamiliarmacroeconomic

frameworkwhereinflationwould

decline,centralbankswouldcut

interestratesandbondsandcurrencieswouldrallyaccordingly.Todaythe

driversarestructural:industrial

convergence,defenseinvestment,

infrastructurespendingandEU-fundedcapitalinvestment.

Polandremainstheregion’seconomicanchorandtheclearestillustration

ofthisshift(Display4).Itislikelytoremainaprincipalbeneficiary

ofEurope’sdefensebuildoutandindustrialexpansionwithRRFandSAFEseenasthecountry’sprimarysourcesoffundsin2026.AlthoughRRFfundscanonlybedisbursedbytheEuropeanCommissionthrough

DISPLAY4

IndustrialPowerMovesEast

PolandrisesasGermanycontracts

RelativeIndustrialProductionIndices

130

120

110

100

90

80

70

60

50

Dec

2016

GermanyPoland

Dec

2020

Jun

2026

Dec

2024

Dec

2022

Dec

2023

Dec

2025

Dec

2018

Dec

2019

Dec

2021

Dec

2017

Source:Haver.Asof6/30/2026.

endofthisyear,Polandmayplantospendthemoneyoveralongerperiod,transferringfundstobeneficiaries

laterin2027.

ShouldrelationswiththeEuropean

Unionimprove,thereleaseof

suspendedfundscouldmakeHungaryaconvergencestoryratherthana

macro-stabilizationtrade,reducing

sovereignriskpremiumsandimprovingtheoutlookfordomesticassets.

Politicaldevelopmentsthereforehavethepotentialtobecomeanimportantcatalystforbothfixedincomeand

equitymarkets,boostinggrowth,easingfiscalpressuresandincreasingbankingsectorliquidityandFXreserves.

Acrosstheregion’ssmaller

emergingandfrontiermarkets,threetailwindsareevident.The

firstisimprovingpoliticalstability

andreformmomentum,whichhave

reducedrisksthatpreviouslydeterredinternationalinvestors.Thesecond

isthetransformationofthebanking

sector.Theinflationshockof2021–23,whilepainful,fundamentallyimprovedtheprofitabilityoftheregion’s

predominantlydeposit-fundedbanksbyliftingnetinterestmarginsafter

yearsofultralowinterestrates.Strongcapitalpositions,resilientearnings

andtheprospectofincreasedcredit

demandassociatedwithinfrastructureinvestmentshouldcontinuetosupportthesector.Thethirdisthescaleof

EUfunding.RRFallocationsamounttoapproximately11%inCroatia,6%inRomaniaand3%inSlovenia.Relativetothesizeoftheseeconomies,

thisrepresentsasizeablepipeline

ofinvestmentininfrastructure,

digitalizationandtheenergytransitionthatfewregionsgloballycanmatch.

6MORGANSTANLEYINVESTMENTMANAGEMENT|BIGPICTURE

ARegimeChange,notaEuropeanRenaissance

Europeismobilizing,thoughithasnotyetsolveditsstructuralproblems.ThisdistinctioniscriticaltotheinvestmentcaseforEurope.

TheEUhasnotproducedaglobal-scaleplatformcompanyinageneration.

Venturefundingremainsafractionof

U.S.levels.Thecumulativeunrealized

corporateR&Dgapsince2012has

reachedapproximately€740billion,a

numberrepresentingforgoneinnovation,productivity,employmentandtax

revenue.Fragmentedcapitalmarkets

thatcannotfundscale,rigidlabor

marketsthatpreventcreativedestructionandregulationcalibratedacross27

jurisdictionsraisethecostofgrowth.

Ashrinkingworking-agepopulation,risingpensioncostsandahardeningpoliticalconsensusagainstnon-EUmigrationallservetocreatealaborsupplyconstraintthatnoindustrialpolicycandirectly

address.Spain’simmigration-drivenlaborsupplyboost,drawingonLatinAmericanworkerswithlanguage,culturaland

qualificationadvantages,istheexception.

EUelectricitypricesaremateriallyhigherthanthoseintheU.S.orChina.GassetsthemarginalpriceofEuropeanelectricitydespiteaccountingforonly18–20%ofgeneration,leavingtheindustrialbase

exposedtogeopoliticalvolatility.

Nearlytwoyearsafterthe2024DraghiandLettareportsthatdiagnosed

Europe’scompetitivenessissues,

implementationremainsnarrow.

Deregulationfacesinstitutional

resistance.Capitalmarketsintegrationrequiresformsoftaxharmonization

thatmemberstateshaveresisted;thebankingunionrequiresdepositinsurancethatcreditorstatesremainreluctanttofund.Thenearunanimityrequirement

across27memberstatesisaload-

bearingstructuralconstraintthathas

consistentlypreventedEuropefrom

deliveringreformatspeedandscale.

Thegeopoliticalshocksofthepastfouryearshavefinallycreatedapolitical

coalitionbroadenoughtoactanda

looserfiscalframework.Europehas

notsolveditsunderlyingproblems,

butithaschangedthetrajectory.For

investorswithalonger-termtime

horizon,thecontinentisenteringa

multi-yearcapitalexpenditurecycleindefense,AIandindustrialmodernization,offeringadifferentreturnprofilethaninthelastdecade.

FROMGEOGRAPHYTOPORTFOLIO

WhereCountriesand

ThemesBecomeInvestable

WebelieveaEuropeanportfolioisbestconstructedbyunderstandingindividualcountriesandstructuralthemesthat

transcendanysinglecountry.Thekeyforinvestorsisdeterminingwhenthecountryitselfistheinvestmentthesis,andwhenabroaderdominantcross-countrythememattersmorethananyonemarket(Display5).

Thematrixonthefollowingpagemapseachcountry’sweightintheMSCIEuropeIndexagainstitssectorcomposition,

helpingtodistinguishwherecountry-

specificcatalystsdominateandthematicexposureacrossbordersoffersthebetterinvestment.Thisdistinctionmattersas

muchforriskmanagementasitdoesforreturngeneration.

InFrance,Germany,Britain,the

NetherlandsandtheNordicsthe

strongestopportunitiescutacross

bordersandarebettercaptured

throughspecificcompaniesandthemes,wheretheEuropeancapitalcycle

mattersmorethananysinglecountry’sgrowthrate.

Defenserearmamentandindustrial

automationmakeforacompellingstoryinFrance,Germany,Sweden,BritainandincreasinglyPoland.Nosinglecountryallocationcapturesthewholetheme.PowerinfrastructureandelectrificationrunfromtheNetherlandsthrough

GermanytoSpain,France,theNordicsandEasternEurope.Thisisacontinent-wideCapExcycleratherthanasectorbetwithinasinglemarket.

EuropeisunlikelytochallengetheU.S.inconsumer-facingfrontierAIplatforms.PerhapsitscomparativeadvantageliesinsteadintheindustrializationlayerofAI:thepicksandshovelsofthebuild-

outincludingsemiconductorcapital

equipment,gridtransformers,gas

turbinesandindustrialautomation.

Europe’spushfordatasovereigntyandreduceddependenceonnon-Europeantechnologycreatesanadditional

opportunityinsovereigncompute

(resourcesfortraininganddeployingAI),cloudandcyberinfrastructure.Muchofthisbuildoutremainsinprivatemarkets,broadeningtheopportunitysetfor

assetownersbeyondlistedequities.Europeanfinancingremains

predominantlyledbybanks,unliketheU.S.landscapedominatedby

capitalmarkets.Banksarenotsimplyabeneficiaryofeconomicexpansionbuttheyareoneofitsprincipal

transmissionmechanisms.

ThesamelogicappliesacrosspartsofSouthernEurope.InSpain,Greeceandotherformerperipheraleconomies,

strongerrelativegrowth,healthier

private-sectorbalancesheetsand

improvingcreditcreationflowdirectlyintodomestically-orientedfinancialsandcyclicals.Here,unlikeinFrance

BIGPICTURE|MORGANSTANLEYINVESTMENTMANAGEMENT7

DISPLAY5

What’sInsideEachMarket?

SectorpercentbycountryoftheMSCIEuropeIndex

COUNTRY

TECHNOLOGY

FINANCIALS

INDUSTRIALS

DISCRETIONARY

MATERIALS

HEALTHCARE

STAPLES

ENERGY

COMMS

UTILLITIES

REALESTATE

TOTAL

Britain

0.2

6.2

2.9

0.8

1.8

2.9

3.2

2.5

0.4

1.1

0.1

22.2

France

0.5

2.1

4.7

1.8

1.1

1.3

1.3

1.2

0.4

0.6

0.2

15.2

Switzerland

0.1

3.1

1.9

1.0

0.9

5.4

2.1

0.0

0.1

0.0

0.1

14.7

Germany

2.0

3.1

4.1

1.0

0.7

1.0

0.2

0.0

0.8

0.7

0.1

13.5

Netherlands

5.7

1.5

0.3

0.4

0.2

0.1

0.7

0.0

0.3

0.0

0.0

9.2

Spain

0.0

3.0

0.6

0.7

0.0

0.0

0.0

0.2

0.2

1.4

0.0

6.1

Sweden

0.3

1.3

2.4

0.1

0.2

0.1

0.1

0.0

0.7

0.0

0.1

5.3

Italy

0.0

2.7

0.5

0.5

0.0

0.0

0.0

0.4

0.1

0.9

0.0

5.2

Denmark

0.0

0.3

0.7

0.1

0.2

1.3

0.1

0.0

0.0

0.1

0.0

2.7

Finland

0.4

0.6

0.3

0.0

0.1

0.1

0.0

0.1

0.0

0.1

0.0

1.8

Belgium

0.0

0.4

0.0

0.0

0.0

0.6

0.5

0.0

0.0

0.0

0.0

1.7

Norway

0.0

0.2

0.1

0.0

0.1

0.0

0.1

0.3

0.1

0.0

0.0

0.9

Ireland

0.0

0.3

0.2

0.0

0.0

0.0

0.1

0.0

0.0

0.0

0.0

0.6

Austria

0.0

0.5

0.0

0.0

0.0

0.0

0.0

0.1

0.0

0.0

0.0

0.6

Portugal

0.0

0.1

0.0

0.0

0.0

0.0

0.0

0.1

0.0

0.1

0.0

0.3

MSCI

Europe

IndexTotal

9.3

25.2

18.8

6.3

5.3

12.8

8.6

4.8

3.2

5.0

0.6

100

SectorpercentoftheMSCIAllCountryWorldIndex(ACWI)andMSCIU.S.Index

MSCIACWI

30.7

15.9

10.8

9.1

3.7

7.9

5.0

4.1

8.6

2.5

1.7

100

MSCIU.S.Index

36.4

12.2

8.9

9.4

1.9

9.1

4.6

3.4

10.1

2.2

1.8

100

SectorpercentbycountryoftheMSCIEFMCentralandEastEuropeandCISIndex

EasternEurope/Frontier

Poland

2.2

47.1

1.8

13.0

8.5

0.0

5.6

16.8

3.2

1.8

0.0

100

Hungary

0.0

75.6

0.0

0.0

0.0

11.9

0.0

12.5

0.0

0.0

0.0

100

Czech

0.0

43.1

0.0

0.0

0.0

0.0

0.0

0.0

0.0

56.9

0.0

100

Romania

0.0

30.3

0.0

0.0

0.0

2.8

0.0

30.1

5.0

29.7

2.0

100

Croatia

0.0

0.0

55.9

8.3

0.0

0.0

12.3

0.0

23.5

0.0

0.0

100

Greece

0.0

70.7

5.6

8.6

0.0

0.0

0.0

0.0

4.8

10.2

0.0

100

Slovenia

0.0

35.3

4.6

11.8

0.0

46.1

0.0

0.0

2.2

0.0

0.0

100

Lithuania

0.0

40.4

0.0

0.0

0.0

0.0

0.0

0.0

0.0

59.6

0.0

100

Estonia

0.0

62.0

25.1

0.0

0.0

0.0

12.9

0.0

0.0

0.0

0.0

100

Source:Bloomberg.Asof6/30/2026.lndexdefinitionscanbefoundonpage9.

8MORGANSTANLEYINVESTMENTMANAGEMENT|BIGPICTURE

orBritain,thedomesticmacrothesisandthecorporateearningsthesiscanreinforceoneanother.

EasternEuropeanconvergencelives

largelyoutsidethebenchmark.EasternEuropeanbanks,predominantlydeposit-funded,provideaparticularlydirect

expressionofthatcycle.Adecade

ofdeleveraginghasrestoredcredit

capacity,justaspublicinvestmentandindustrialrelocationarestimulatingprivatecreditdemand.

Itisourviewthataresulting

portfoliohasanaturalbarbellwithcountryconvergenceandcontinentalthemes.Ononesidearetargeted

countryexposureswheredomesticmacroeconomicimprovementis

expectedtobethereturndriver,

particularlyinSouthernandEasternEurope.Ontheotherarecross-borderthemes,specificallyrearmament,

electrification,automationandAIinfrastructure,thatwebelievearebestconstructedbottom-upacrossmarkets,ratherthanthroughbroadcountryallocations.

Thesameregimechangeextendsbeyondequitiesintosovereignandcorporate

credit,infrastructureandprivatemarkets.Forassetowners,Europe’snewcapitalcycleisinherentlymulti-asset.

Conclusion

Europehasnotsolveditsstructuralproblems.Butithaschanged

itstrajectory.

Geopolitics,fiscalpolicyandthe

pushforgreaterstrategicautonomy

aredrivingacapitalcycleindefense,

energy,infrastructureandindustrial

modernizationafterdecadesof

underinvestment.Theopportunityis

neitheruniformnorwellcapturedby

theMSCIEuropeIndexbenchmark:

inSouthernandEasternEurope,the

countryitselfcanbetheinvestment

thesis;elsewhere,thebetterexpressionliesincompaniesexposedtostructuralthemesthattranscendnationalborders.Thelastdecaderewardedinvestors

forlookingpastEurope.Thenext

mayrewardthemforlookingbeneaththeindex.

RiskConsiderations

Thereisnoassurancethataportfoliowillachieveitsinvestmentobjective.Portfoliosaresubjecttomarketrisk,which

isthepossibilitythatthemarketvaluesofsecuritiesownedbyaportfoliowilldeclineandthatthevalueofportfolio

sharesmaythereforebelessthanwhatyoupaidforthem.Marketvaluescanchangedailyduetoeconomicandother

events(e.g.naturaldisasters,healthcrises,terrorism,conflictsandsocialunrest)thataffectmarkets,countries,

companiesorgovernments.Itisdifficulttopredictthetiming,duration,andpotentialadverseeffects(e.g.portfolio

liquidity)ofevents.Investingincompaniesinanticipationofacatalystevent,suchasArtificialIntelligence(AI)adoption,carriestheriskthatsuchcatalystsmaynothappen,orthemarketmayreactdifferentlythanexpected.Companies

focusedonAImayhavelimitedproductlines,markets,orfinancialresources,andthemanagementofsuchcompanies

maybemoredependentupononeorafewpeople.APortfoliomaybeparticularlyimpactedbyeventsthatadversely

affectAIadoption,suchasrapidchangesintechnologyproductcycles,productobsolescence,governmentregulation,

andcompetition,andmayfluctuatemorethanthatofaportfoliothatdoesnotinvestsignificantlyincompaniesadoptingAI.Investmentsinforeignmarketsentailspecialriskssuchascurrency,political,economic,marketandliquidityrisks.

BIGPICTURE|MORGANSTANLEYINVESTMENTMANAGEMENT9

INDEXDEFINITIONS

TheMSCIEuropeIndexisafreefloat-adjustedmarketcapitalizationindexthatisdesignedtomeasuredevelopedmarketequityperformancein

Europe.Theterm“freefloat”representstheportionofsharesoutstandingthataredeemedtobeavailableforpurchaseinthepublicequitymarketsbyinvestors.TheperformanceoftheIndexislistedinU.S.dollarsandassumesreinvestmentofnetdividends.

TheMSCIAllCountr