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3 minutes to read by David Lambert, Managing Director & Senior Portfolio Manager, Head of European Equities, RBC Global Asset Management (UK) Limited Feb 23, 2026

Strong performance continues as relative valuations remain attractive

International equity markets delivered exceptional returns in 2025, with the MSCI Europe Index surging 29% in Canadian-dollar terms and the MSCI EAFE index advancing 25%. This momentum has carried into 2026. Despite this strong performance, international markets continue to offer compelling value compared to U.S. equities.

The valuation disparity between European and U.S. markets presents a notable opportunity for investors. European equities are currently trading around 15 times earnings with expected earnings growth of 15% for the coming year, while U.S. equities trade around 22 times earnings with projected growth of 16%. This presents a favourable set-up for international investors.

Europe's fiscal transformation

A fundamental shift is underway in European economic policy, with significant fiscal and defense spending announcements across the region. These are aimed at enhancing economic growth, strategic autonomy and security. Germany alone has committed over $1 trillion euros on infrastructure and defense, a major departure from the country’s traditionally austere fiscal stance. Economic data in Germany is now pointing to the effect being felt in the real economy.

Consequently, domestic Europe is starting to look more attractive. Leading indicators are improving from a low base, and this supports an improved earnings outlook. We have been adding to positions in this area.

Banking sector renaissance

The European banking sector has undergone a remarkable transformation. Southern European banks, in particular, were forced to strengthen their operations, resulting in stronger balance sheets, higher capital ratios, and more shareholder-friendly distributions. Perhaps most significantly, loan growth has returned to the European banking system after a considerable absence.

The performance has been striking. Spain's banking sector, for example, has surged 80% from the beginning of 2025 through early 2026 in Canadian-dollar terms.

Japan's awakening

Japan is emerging from decades of persistent deflation, with wage growth finally materializing. This development is complemented by ongoing corporate governance reforms that have corporations increasingly focused on shareholder returns.

Prime Minister Takaichi’s pro-fiscal stimulus agenda, including spending on nuclear energy, defense, and infrastructure, should provide a tailwind for domestically focused Japanese companies. Leading indicators continue to improve while valuations remain relatively attractive compared to U.S. markets.

Investment philosophy: quality and compounding

Our investment approach centres on identifying companies that can generate high and sustainable levels of profitability and compound shareholder value over time. We have team members in both London and Hong Kong doing rigorous company-level research to identify the best opportunities.

International markets are undergoing a structural shift, driven by fiscal stimulus and corporate reforms. Despite recent strength, equity valuations remain attractive on a relative basis. This, coupled with an improving earnings outlook, make us more constructive on the region.

Get the latest insights from RBC Global Asset Management.

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Disclosure

Date of publication: Feb 23, 2026

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