“It is when we are most lost that we sometimes find our truest friends.” ~ The Grimm Brothers

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Europe is navigating choppy waters. Investors are nervously watching Germany, the continent’s economic powerhouse, where stagnation and mounting credit risks are creating the most challenging business conditions since the creation of the monetary bloc. Yet for the shrewd and patient, periods of uncertainty often also birth opportunity. Especially for those with insight into Germany’s fabled Mittelstand and the broader European periphery.

Germany finds itself at a crossroads. Fora third consecutive year, Europe’s largest economy has flirted with recession. The manufacturing engine, facing global demand headwinds, are now being pushed further into the corner by a US-trade deal that has no benefits to the region. Banks, responding to a sharp rise in corporate defaults and distressed real estate assets, have tightened lending standards. Indeed, the German Mittelstand are more vulnerable than ever to rising costs and restricted credit flows. Across the corporate sector, especially in real estate and export-driven businesses, non-performing loans and insolvencies are climbing, with pundits fearful that a tipping point could spark wider instability.

With pressures mounting, calls are growing for Berlin to abandon fiscal orthodoxy. If Germany opts to stimulate its way out of potential crisis by boosting infrastructure spending, providing SME relief, and increasing its commitment to European defence, it could mark the end of austerity’s dominance. Already, geopolitical shifts and security concerns are making a defence budget expansion inevitable despite “debt brake” limitations.

We believe that such a pivot would almost certainly bring a new dynamism. Fiscal stimulus could break the stagnation cycle, revitalize domestic demand, and drive major investment, especially if channelled into innovation, technology, and digital infrastructure.

For the Mittelstand, new public investment and defence procurement could open doors, offering the chance to pivot toward new, higher-value sectors. Companies agile enough to tap into defence, cybersecurity, and infrastructure supply chains could thrive, strengthening Germany’s long-term competitiveness. Meanwhile, a weaker euro, the likely side effect of looser fiscal policy and higher deficits, would bolster exports and make European goods more attractive globally, offering a rare tailwind for both Germany and its European neighbours.

Peripheral European countries, already profiting from a tourism boom, would also benefit. Should Germany’s growth engine restart, demand for imports from Central, Eastern, and Southern Europe will likely rise, stimulating job creation and economic convergence in the region.

Rising downside risks in Germany and Europe are real and warrant a thoughtful approach. But if policymakers embrace the opportunity, especially with an eye toward innovation and infrastructure, investors should remain engaged.

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Market Review

Global equity markets delivered mixed results in July. The Bloomberg World Equity Index rose 1.43%, supported by strong performance out of the U.S., driven by a strong reporting season, and China, which were up almost 5% on the month, driven by renewed optimism around a trade deal and local stimulus measures.

Generally, growth stocks led the rally as value lagged. Europe ex-UK and Japanese equities lagged as the US Dollar rose significantly in July following material weakness in the first half of 2025.

Emerging markets advanced c. 2%, maintaining strong momentum year-to-date YTD. The UK also remained robust, with the UK Equity market deliver solid returns over the course of the month, leaving it up almost 15% YTD.

Fixed income saw mostly negative returns in July. The Global Agg fell -1.5%, weighed down by higher yields and a rallying U.S. dollar (USD Trade Weighted Index up 3.09%). U.S. Treasuries dipped -0.39%, while euro and sterling denominated government bonds also slipped. Corporate bonds fared better, as spreads remain tight.

In currency markets, the U.S. dollar strengthened, while the euro and pound declined. Gold was flat, but stayed near all-time highs, up c. 30% YTD in USD terms. Oil surged 7.28%, reversing prior softness, while copper slumped almost -5%. Bitcoin was a notable winner, rallying 8.26% in July, almost double the value it was a year ago.

Overall, July’s market narrative reflected selective equity strength, commodity volatility, and bond market headwinds. A reflection of the current market narratives and persistence in macro and policy uncertainty.

The importance of diversification cannot be overstated.

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To see graphs, download the PDF using the button at the top of this page.