The real investment case for AI in Europe is not in creating foundational models but in adoption. The continent's vast 'old economy' index has significant potential for productivity gains. As AI's return on investment becomes clear, Europe could be re-rated as a major beneficiary of AI adoption, capitalizing on its large industrial base.

Chronic issues like high energy costs and regulatory burdens, combined with a failure to implement meaningful reforms (e.g., only 11% of the Draghi report), have weakened Europe's competitiveness. This leaves the continent exposed and losing market share as China aggressively pursues an export-led growth strategy.

Europe's path to economic growth may be easier than America's precisely because it's starting from a lower base. It's easier for a '1.5 GPA student' to improve to a 2.5 than for a '3.6 GPA student' to reach a 4.0. With strong universities and talent, Europe has the assets to make significant gains by fixing fundamental issues.

While the upcoming 2026 German/EU fiscal stimulus is expected to boost industrial demand, the benefits won't materialize immediately. The key investment strategy is identifying companies with the cash flow and balance sheet strength to survive the interim period before the stimulus-led recovery begins.

A persistent headwind for European markets is the dual impact of rising Chinese competition and weak demand from China. For the past several years, this single factor has been responsible for a staggering 60% to 90% of all earnings downgrades across the European index, particularly hitting sectors like chemicals and autos.

China's economic structure, which funnels state-backed capital into sectors like EVs, inherently creates overinvestment and excess capacity. This distorted cost of capital leads to hyper-competitive industries, making it difficult for even successful companies to generate predictable, growing returns for shareholders.

European automakers, heavily invested in combustion engines and hampered by regulations that stifle new entrants, are ill-equipped to compete with China's cheaper, superior electric vehicles. This creates an existential threat to a cornerstone of Europe's industrial economy.

As China's domestic growth slows, it is flooding the world, particularly Europe, with cheap exports. This acts as a powerful disinflationary force that may compel the European Central Bank (ECB) to cut interest rates sooner than anticipated, regardless of their current hawkish rhetoric.

China's robust export sector is overcompensating for its weak domestic property market. This is projected to create a current account surplus equal to 1% of global GDP—a historical record—which will act as a significant headwind for its trading partners, particularly industrial economies in Europe like Germany.