European equities: structural case remains intact amid Iran conflict

• Geopolitical escalation has driven short-term risk-off moves. Strikes on Iran’s nuclear and missile infrastructure have pushed energy prices higher and sent the STOXX Europe 600 lower, reflecting concerns over potential supply disruptions and inflation risks.

• Sector impacts are uneven, creating selective opportunities. Energy and defence companies stand to benefit from higher commodity prices and rising defence spending, while travel, luxury goods and some cyclical sectors may face near-term headwinds from energy costs and weaker risk sentiment.

• Structural support for European equities remains intact. Profitability in sectors such as banking continues to converge toward US peers, while investors increasingly view Europe as a diversification destination amid elevated concentration risks in US markets.

• Our base case remains a contained de-escalation scenario. While traffic at the Strait of Hormuz has been severely disrupted, existing supply buffers should cushion against an immediate shortfall. Both sides retain strong incentives to avoid a full-blown, protracted conflict.

The recent escalation between the US, Israel and Iran, which began in late February 2026 following strikes on Iran’s nuclear and missile infrastructure, has triggered a sharp risk-off move in European equities. The STOXX 600 posted a 5.5% decline last week as investors assessed the risk of a more prolonged conflict and the inflationary consequences of higher energy prices. However, we view the current sell-off primarily as a short-term shock rather than a structural deterioration in the region’s investment outlook.

Base case: a contained de-escalation

Oil and natural gas prices have both surged, but for Europe, natural gas is arguably the more important transmission channel. Gas accounted for 15.9% of EU electricity generation in 2024, and its impact on power prices is larger than that headline share suggests because gas-fired plants often set the marginal electricity price in European power markets.

Our base case remains a contained de-escalation scenario. While traffic at the Strait of Hormuz has been severely disrupted, existing supply buffers should cushion against an immediate shortfall. Critically, both Iran and the US retain strong incentives to avoid a full-blown, protracted conflict — the economic costs of sustained energy disruption would fall heavily on both sides.

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At the same time, the medium-term oil demand outlook remains moderate, with global consumption growth expected to slow alongside weaker economic momentum. Should the conflict de-escalate, prices are likely to ease from current elevated levels — though near-term volatility will persist as long as the Strait of Hormuz remains severely disrupted.

Under this base case, we expect some near-term headwinds for European corporate fundamentals, but view the recent market pullback as a potential opportunity for selective bottom-fishing.

Structural investment case for European equities remains intact

Beyond the near-term geopolitical volatility, the structural investment case for European equities remains intact and, in some respects, has strengthened in recent years.

Profitability across several key sectors, particularly banking, has improved materially following a decade of balance sheet repair, stronger capital buffers and tighter cost discipline. As a result, returns on equity for European banks have been steadily converging toward those of US peers, while valuations remain comparatively undemanding.

At the same time, Europe is regaining strategic relevance in global capital allocation. Elevated concentration in US equity markets, combined with growing geopolitical uncertainty, has prompted investors to reassess geographic diversification. In this context, European equities offer both relative valuation attractiveness and sector diversification.

In parallel, policymakers across the region are reinforcing domestic industrial and defence capacity through coordinated fiscal initiatives while expanding trade partnerships beyond the traditional transatlantic axis. These developments reduce single-partner dependency and provide a multi-year structural tailwind for several European industries.

Taken together, these structural shifts suggest that the recent conflict-driven market volatility does not alter the longer-term investment case for the region. Instead, near-term weakness may provide selective entry opportunities within a broader medium-term allocation opportunity for European equities.

Related article: Europe Outlook 2026: Access growth at a reasonable price

Sector views

Sector	Our Views
Energy	Direct beneficiary of oil and gas price surge. Supply disruption risk supports elevated prices near-term.
Defence	Structural re-armament cycle accelerating. NATO 5% GDP spending target. Germany’s removal of defence budget cap. Defence budgets face fewer political hurdles in current environment.
Banking	Profitability convergence with US peers continues. Higher-for-longer rates support NII. Valuations remain undemanding relative to fundamentals.
Information Technology	Risk-off sentiment creates short-term volatility, but European tech carries limited direct Middle East supply chain exposure.
Healthcare	Classic defensive hedge with non-cyclical demand. Near-term safe haven appeal.
Travel & Aviation	Airlines are vulnerable on both the cost side and the demand side, even in a contained-conflict scenario.
Luxury Goods	Headwinds from slowdown in Chinese consumer demand — the sector's largest growth driver — as China's energy costs rise. Reduced travel-linked purchasing amid airspace disruptions further pressures duty-free channel sales.

From a sector perspective, energy and defence remain the clearest beneficiaries if geopolitical stress persists. Energy producers would benefit from higher crude prices and tighter supply expectations, while defence companies should continue to gain from Europe’s structurally rising security spending.

Airlines remain one of the more exposed sectors, facing headwinds on both the cost and demand fronts. Higher oil prices would lift fuel costs, with hedging only partially offsetting the pressure. At the same time, route disruptions and cancellations in affected areas could weigh on booking activity. Reuters has reported that the closure of airspace across parts of the Middle East and disruption at key hubs such as Dubai and Doha are already weighing on travel-linked activity.

For luxury goods, the more defensible near-term concern is not a vague “wealth effect” but softer Chinese demand and weaker travel-related spending. Bain expects China’s luxury market to recover only modestly in 2026 after a difficult 2025, while the current conflict is disrupting travel and business flows through the Middle East, which matters for airport and tourism-linked luxury purchasing.

Relative to sectors such as airlines, chemicals or energy-intensive manufacturing, European technology has less obvious first-order exposure to Middle East transport disruption or fuel-cost shocks. Any indiscriminate selloff would therefore be more valuation-driven than fundamentally linked to the conflict itself.

Healthcare should continue to act as a near-term defensive hedge given its relatively non-cyclical demand profile and less directly exposed to energy costs or economic cycles. In periods of heightened geopolitical uncertainty, the sector has historically offered more resilient earnings visibility compared with cyclical industries.

Europe’s improved energy resilience

A key difference relative to previous energy shocks is that Europe’s energy system is structurally more resilient than it was prior to the Russia–Ukraine war. Over the past three years, the EU has significantly reduced its reliance on Russian pipeline gas and diversified supply toward global LNG markets, particularly imports from the United States.

US LNG exports have become a critical component of Europe’s energy security framework, and the conflict in the Middle East does not directly disrupt these flows. At the same time, additional LNG export capacity from the US is expected to come online this year, which should gradually ease global supply constraints.

While Europe remains exposed to global energy price volatility, these structural adjustments provide an important buffer against severe supply shortages. As the season transitions into spring, it should further reduce heating demand in the coming months.

Taken together, these factors suggest that while higher energy prices may create near-term headwinds for European corporates, the region is materially better positioned to manage energy shocks than during previous crises.

Summary

In summary, our base case supports a constructive medium-term view on European equities, with near-term geopolitical volatility offering selective re-entry opportunities — particularly in defence, energy and quality financials.

The structural investment case for Europe remains intact, supported by improving sector profitability, rising strategic importance in global capital allocation, and expanding fiscal support for defence and industrial capacity. Based on a fair PE of 15x, an upside of 20.6% remains for the market by the end of 2028.

Investors can access this opportunity by investing in the Eastspring Investments Unit Trusts - Pan European SGD, our recommended equity fund for Europe. For a low-cost, index-tracking approach, our recommendation would be the Vanguard FTSE Europe ETF.

Table 1: Projections for SXXP Index
SXXP	2025	2026E	2027E	2028E
EPS	35.75	39.14	43.25	48.16
EPS growth	0.28%	9.48%	10.50%	11.35%
PE Ratio	16.75	15.30	13.85	12.43
Upside Potential (fair pe of 15x)	-	-	-	20.63%
Target Price  (EUR)	-	-	-	722
Source: Bloomberg Finance L.P., iFAST Estimates
Data as of 12 March 2026

Chart 1: SXXP index projection till year 2028.

Declaration:

This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a NIL position in the abovementioned securities. The analyst who produced this report holds a NIL position in the abovementioned securities.