European stocks were hit hard by the outbreak of war in Iran and the Middle East, leaving investors concerned about the region and considering whether it still represents a good investment opportunity.
As a net importer of energy, the continent stands to be heavily impacted by higher oil prices and increased inflation as a result of the conflict.
But there are still opportunities to be found, as long as investors are willing to be selective and know where to look.
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“The conflict with Iran has raised global economic risks, especially for importers of energy such as Europe and the UK,” said James Flintoft, head of investment solutions at AJ Bell.
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The Stoxx 600 index fell 9.6% in three weeks from 27 February, amid a broader global stock market panic that saw the Korean exchange implement a circuit breaker.
Often in investing, times of panic create buying opportunities for those that can keep their heads. So, amidst the broad selloff in European stocks, are there some sectors that could show resilience?
Could European energy stocks benefit from higher oil and gas prices?
One obvious European sector that could benefit from the recent turmoil is energy. Marcel Stötzel, co-portfolio manager of Fidelity European Trust and Fidelity European Fund, highlights that some European energy companies are relatively appealing in terms of their valuations compared to international counterparts. TotalEnergies (PA:TTE), for example, trades at a lower forward P/E ratio than BP, Shell or Exxon Mobil as of 23 March.
Read more on three other European stocks Stötzel recommends for long-term growth and income.
The Stoxx Europe 600 Energy index, which holds European stocks in the energy sector, gained 8% between 27 February (prior to the outbreak of the war) and 23 March. TotalEnergies gained 13% over the same period.
Could European defence stocks rise on geopolitical tensions?
Defence stocks tend to rise when global conflicts ramp up; there is a fairly direct link between geopolitical turmoil and higher spending on military equipment (like drones and ammunition) and defence technology spending.
Europe’s defence stocks have performed particularly well since the beginning of 2025. Trump’s return to the White House has brought a renewed emphasis on European self-sufficiency when it comes to defence, which appears to have kicked governments into gear about making up for decades of underspending.
This was brought into sharp focus when Trump made his desire for greater US control over Greenland clear earlier this year.
“[European] countries are going to go from sub-3% [of GDP spent on defence] to 3%, 4% or even 5%,” said Stötzel. “That would be very strong growth rates; we’re talking very healthy double digit top-line growth.”
There is a catch, though, in that recent rises have made lots of European defence stocks expensive. Rheinmetall (DE:RHM) trades at over 70 times trailing earnings; Saab (STO:SAAB-B) trades at around 60 times on the same metric.
“It’s a tough setup for defence stocks, because a lot of them have baked in around 10 years [of growth],” said Stötzel. “It feels like quite a big risk.”
For that reason, Stötzel’s portfolios are underweight European defence stocks, though they hold MTU Aero Engines (DE:MTX), a German aerospace company that derives around 20% of its revenue from defence contracts, mostly with the German air force.
What is the outlook for European infrastructure?
Similarly to defence, European infrastructure is set to benefit from spending increases that were unlocked last year, not least the German debt brake agreement that unlocked €500 billion in extra potential spending on infrastructure and defence.
The continent is entering into a multi-decade programme wherein governments and companies are investing in renewing ageing infrastructure assets.
European infrastructure stocks are “shaped by sustained investment commitments rather than near-term economic cycles”, said Pierre Debru, head of research, Europe at asset manager WisdomTree. “Capital is increasingly being directed toward energy networks, transport and digital infrastructure as Europe prioritises security of supply, modernisation and resilience.”
While the phenomenon is usually associated with the US, Europe is also undergoing its own AI data centre building boom.
France, in particular, is an attractive location for data centres because it has abundant cheap nuclear power.
“You also see some of the Nordic players signing some big deals, because they have cold temperatures, which helps with cooling,” said Stötzel.
Is there a buying opportunity in European mining stocks?
European mining stocks have also been caught up in the selloff following the outbreak of the conflict. The Stoxx Europe 600 Basic Resources index fell 13% between 27 February and 23 March.
But Asad Farid, portfolio manager of the JSS Sustainable Equity – Strategic Materials fund thinks that this presents a buying opportunity for investors, as some metals prices could rise as a result of the conflict.
“Aluminium is unique,” said Farid. “The Middle East accounts for 8 to 9% of global production, with Qatar, UAE, and Bahrain being the top producers.” Not only will the conflict restrict the supply of aluminium, but higher electricity costs will also benefit companies like Norwegian aluminium Norsk Hydro (OSLO:NHY) because Asian competitors will be harder hit.
He added that copper prices could rise, since mines in DRC and Zambia depend on imported sulphur, largely from the Middle East, for oxide ore processing.
How to invest in European stocks
Several investment trusts offer exposure to European markets; the largest of these by market capitalisation (as of 23 March) is Fidelity European Trust (LON:FEV), which merged with the second largest, Henderson European Trust, in September.
The next largest are JPMorgan European Growth & Income (LON:JEGI) and BlackRock Greater Europe (LON:BRGE).
Investment trusts offering exposure to European small caps include The European Smaller Companies Trust (LON:ESCT), JPMorgan European Discovery (LON:JEDT) and Montanaro European Smaller Companies (LON:MTE).
There is also a wide range of exchange-traded funds (ETFs) that offer exposure to Europe, either broad-based or thematically.
Some broad-based European index funds are the Amundi MSCI Europe UCITS ETC (LON:MEUG) or the FTSE Developed Europe ex-UK UCITS ETF (LON:VERG).
For energy exposure the iShares MSCI Europe Energy Sector UCITS ETF (LON:ESIE) tracks the MSCI Europe Energy 20/35 Capped Index (which contains large and mid-cap European energy stocks, with the weighting of the largest holding capped at 35% and all others capped at 20%). Shell, BP and TotalEnergies are the three top holdings as of 20 March.
For targeted infrastructure exposure, the WisdomTree Europe Infrastructure UCITS ETF (LON:WINF) launched on the London Stock Exchange on 18 March. Or for exposure to European defence stocks, you can choose from iShares Europe Defence UCITS ETF (LON:DFEU), WisdomTree Europe Defence (LON:WDEP) or HANetf’s Future of European Defence Screened UCITS ETF (LON:NAVY).
