• Europe’s quality stocks have seen a significant valuation correction after reaching what were, in our view, clearly excessive valuations during Covid.
  • The inflation spike was bad for quality stocks because their excessive valuation vulnerability outweighed any positive benefit from their underlying pricing power
  • After a valuation reset, the current environment of interest rate cuts, tariffs and moderating inflation should reward selective quality stocks

Covid policy responses have produced big style gyrations in markets

Quality stocks saw a dramatic valuation rerating between 2019 and their 2021 peak (see chart below). The ‘Seven wonders of Europe’ basket was coined by strategists at SocGen and this group of stocks demonstrates the phenomenon well. In many cases, these companies’ valuations reached levels where the risk/reward was extremely poor and their elevated price/earnings valuations were particularly vulnerable to the inflation spike that followed Covid policy responses.

Quality stocks had performed well in the decade after the global financial crisis, up to 2019, but this was primarily driven by earnings compounding against an index with anaemic profit growth. It was only after the Fed guided to lower rates for longer in early 2019 that their dramatic rerating really started.

Any investment outcome is a function of a starting valuation and compounding power. The higher the valuation today, the more that future compounding power has been priced into today’s valuation. Quality stocks typically compound their earnings steadily so the main risk is overpaying for those attributes.

Europe’s most popular stocks dramatically rerated 2019-21 – and have steadily derated since
Valuation re/de-rating of basket of 7 wonders of Europe
Europe’S Most Popular Stocks Dramatically Rerated 2019 21 – And Have Steadily Derated Since
Source:Polar Capital; August 2025. Forecasts contained herein are for illustrative purposes only and does not constitute advice or a recommendation.

The derating of quality stocks has seen their rolling five-year returns fall to the lowest levels outside the global financial crisis (see chart below). Quality stocks typically make high returns on equity and generate double-digit total shareholder returns, so a rolling five-year return of 5% reflects a significant valuation derating, offsetting the strong underlying fundamental compounding power. This is why quality stocks have historically bounced from these levels, their underlying compounding eventually outweighs any derating headwinds. It is also striking how much worse the rolling returns have been for quality than the overall index – by far the worst they have performed in the past 20 years.

Rolling 5-year total return for MSCI Europe Quality Index and Stoxx Europe 600
Rolling Quality Return Chart
Source: Polar Capital; 29 August 2025.

What we are doing in our portfolio

Our investment approach is driven by our watchlist. We constantly compare the stocks in the portfolio to the stocks on our watchlist – competition for capital drives our investment process. Most of the stocks on our watchlist meet our minimum quality criteria (10% return on equity through the cycle), but not our valuation criteria (we look to buy stocks on more than a 4% free cashflow yield).

It felt uncomfortable when our valuation discipline prompted us to sell some of these high- quality stocks on valuation grounds as they rerated in 2018 and 2019. However, this was ultimately the right approach as many of these stocks went on to materially underperform. We see the opposite situation today – it is uncomfortable buying quality stocks with poor price momentum, but many of these stocks are compelling compounding assets (with strong returns on capital employed; excellent moats; track records of double-digit total shareholder returns). There is a relatively high risk that we might be buying too early and a low risk, in our view, that these stocks do not perform handsomely on a three to five-year view given their underlying returns on equity and compounding earnings.

We strongly argue for a selective approach to picking quality laggards. The quality stocks we have been buying over the past year (see chart below) have seen an even more dramatic derating than the high-profile basket of stocks in our first chart. These stocks are now materially cheaper than they were even in 2015, a point from which their compounding characteristics generated excellent outcomes.

Our preferred quality stocks look very cheap compared to their histories
Valuation re/de-rating of our recent quality purchases made in the last year
Our Preferred Quality Stocks Look Very Cheap Compared To Their Histories
Source: Polar Capital; August 2025. Forecasts contained herein are for illustrative purposes only and does not constitute advice or a recommendation.

The volatility of markets since last summer has presented plenty of opportunities to buy good companies that are temporarily out of favour (see table below). We are looking for companies that can deliver total shareholder returns (dividend yield plus earnings growth) of at least 10%. Many of these stocks are likely to be able to deliver low teens levels of total shareholder returns.

We have been steadily finding quality stocks that meet our valuation criteria
We Have Been Steadily Finding Quality Stocks That Meet Our Valuation Criteria
Source: Polar Capital; August 2025.

We think our Fund offers a differentiated approach for investors. Our investment process of looking for good companies when they are out of favour keeps us out of the weakest and most overvalued stocks. The core of our investment process is to seek out the right combination of quality and value. The combination of steady earnings and reliable dividend income helps the Fund act as a defensive anchor. When multiple expansion is not lifting prices, the quality and growth of underlying earnings and cashflows become the primary driver of returns. We own businesses that generate real, compounding value, not ones that benefited from expanding investor enthusiasm.

The Fund’s cumulative return composition
Fund Cumulative Return Composition
Source: Polar Capital; August 2025.

Conclusion

The current market backdrop is presenting unusual opportunities to buy Europe’s quality stocks at a discount to their long-term valuations. In a world of tariffs, central bank interest rate cuts and macroeconomic risks, we think many of these oversold quality stocks offer extremely compelling valuation opportunities.

Risks

  • Capital is at risk and there is no guarantee the Fund will achieve its objective. Investors should make sure their attitude towards risk is aligned with the risk profile of the Fund before investing.
  • Past performance is not a reliable guide to future performance. The value of investments may go down as well as up and you might get back less than you originally invested as there is no guarantee in place.
  • The value of a fund’s assets may be affected by uncertainties such as international political developments, market sentiment, economic conditions, changes in government policies, restrictions on foreign investment and currency repatriation, currency fluctuations and other developments in the laws and regulations of countries in which investment may be made. Please see the Fund’s Prospectus for details of all risks.
  • The Fund invests in the shares of companies and share prices can rise or fall due to several factors affecting global stock markets.
  • The Fund uses derivatives which carry the risk of reduced liquidity, substantial loss and increased volatility in adverse market conditions, such as failure amongst market participants.
  • The Fund invests in assets denominated in currencies other than the Fund's base currency. Changes in exchange rates may have a negative impact on the Fund's investments. If the share class currency is different from the currency of the country in which you reside, exchange rate fluctuations may affect your returns when converted into your local currency.


Important Information:
This is a marketing communication and does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments. Any opinions expressed may change. This document does not contain information material to the investment objectives or financial needs of the recipient. This document is not advice on legal, taxation or investment matters. Tax treatment depends on personal circumstances. Investors must rely on their own examination of the Fund or seek advice. Investment may be restricted in other countries and as such, any individual who receives this document must make themselves aware of their respective jurisdiction and observe any restrictions.

A decision may be taken at any time to terminate the marketing of the Fund in any EEA Member State in which it is currently marketed. Shareholders in the affected EEA Member State will be given notification of any decision and provided the opportunity to redeem their interests in the Fund, free of any charges or deductions, for at least 30 working days from the date of the notification.

Investment in the Fund is an investment in the shares of the Fund and not in the underlying investments of the Fund. Further information about fund characteristics and any associated risks can be found in the Fund’s Key Information Document or Key Investor Information Document (“KID” or “KIID”), the Prospectus (and relevant Fund Supplement), the Articles of Association and the Annual and Semi-Annual Reports. Please refer to these documents before making any final investment decisions. These documents are available free of charge at Polar Capital Funds plc, Georges Court, 54-62 Townsend Street, Dublin 2, Ireland, via email by contacting Investor-Relations@polarcapitalfunds.com or at www.polarcapital.co.uk. The KID is available in the languages of all EEA member states in which the Fund is registered for sale; the Prospectus, Annual and Semi-Annual Reports and KIID are available in English.

The Fund promotes, among other characteristics, environmental or social characteristics and is classified as an Article 8 fund under the EU's Sustainable Finance Disclosure Regulation (SFDR). For more information, please see the Prospectus and relevant Fund Supplement.

ESG and sustainability characteristics are further detailed on the investment manager’s website: - https://www.polarcapital.co.uk/ESG-and-Sustainability/Responsible-Investing/.

A summary of investor rights associated with investment in the Fund here.

This document is provided and approved by both Polar Capital LLP and Polar Capital (Europe) SAS.

Polar Capital LLP is authorised and regulated by the Financial Conduct Authority (“FCA”) in the United Kingdom, and the Securities and Exchange Commission (“SEC”) in the United States. Polar Capital LLP’s registered address is 16 Palace Street, London, SW1E 5JD, United Kingdom.

Polar Capital (Europe) SAS is authorised and regulated by the Autorité des marchés financiers (AMF) in France. Polar Capital (Europe) SAS’s registered address is 18 Rue de Londres, Paris 75009, France.

Polar Capital LLP is a registered Investment Advisor with the SEC. Polar Capital LLP is the investment manager and promoter of Polar Capital Funds plc – an open-ended investment company with variable capital and with segregated liability between its sub-funds – incorporated in Ireland, authorised by the Central Bank of Ireland and recognised by the FCA. FundRock Management Company (Ireland) Limited acts as management company and is regulated by the Central Bank of Ireland. Registered Address: Percy Exchange, 8/34 Percy Place, Dublin 4, Ireland.

For UK investors: The Fund is recognised in the UK under the Overseas Funds Regime (OFR) but it is not a UK-authorised Fund. UK investors should be aware that they may not be able to refer a complaint against its Management Company or its Depositary to the UK’s Financial Ombudsman Service. Any claims for losses relating to the Management Company or the Depositary will not be covered by the Financial Services Compensation Scheme, in the event that either entity should become unable to meet its liabilities to investors. For information on the complaint process to the Management Company, please see the Country Supplement for this fund available at https://www.polarcapital.co.uk/

Benchmark: The Fund is actively managed and uses the MSCI Daily Net Total Return Europe Ex UK Index as a performance target. The benchmark has been chosen as it is generally considered to be representative of the investment universe in which the Fund invests. The performance of the Fund is likely to differ from the performance of the benchmark as the holdings, weightings and asset allocation will be different. Investors should carefully consider these differences when making comparisons. Further information about the benchmark can be found here. The benchmark is provided by an administrator on the European Securities and Markets Authority (ESMA) register of benchmarks which includes details of all authorised, registered, recognised and endorsed EU and third country benchmark administrators together with their national competent authorities.

Third-party Data: Some information contained herein has been obtained from third party sources and has not been independently verified by Polar Capital. Neither Polar Capital nor any other party involved in or related to compiling, computing or creating the data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any data contained herein.

Country Specific Disclaimers: Please be aware that not every share class of every fund is available in all jurisdictions. When considering an investment into the Fund, you should make yourself aware of the relevant financial, legal and tax implications. Neither Polar Capital LLP nor Polar Capital Funds plc shall be liable for, and accept no liability for, the use or misuse of this document.

European Ex-UK Income Eiffel
  • Europe’s quality stocks have seen a significant valuation correction after reaching what were, in our view, clearly excessive valuations during Covid.
  • The inflation spike was bad for quality stocks because their excessive valuation vulnerability outweighed any positive benefit from their underlying pricing power
  • After a valuation reset, the current environment of interest rate cuts, tariffs and moderating inflation should reward selective quality stocks

Covid policy responses have produced big style gyrations in markets

Quality stocks saw a dramatic valuation rerating between 2019 and their 2021 peak (see chart below). The ‘Seven wonders of Europe’ basket was coined by strategists at SocGen and this group of stocks demonstrates the phenomenon well. In many cases, these companies’ valuations reached levels where the risk/reward was extremely poor and their elevated price/earnings valuations were particularly vulnerable to the inflation spike that followed Covid policy responses.

Quality stocks had performed well in the decade after the global financial crisis, up to 2019, but this was primarily driven by earnings compounding against an index with anaemic profit growth. It was only after the Fed guided to lower rates for longer in early 2019 that their dramatic rerating really started.

Any investment outcome is a function of a starting valuation and compounding power. The higher the valuation today, the more that future compounding power has been priced into today’s valuation. Quality stocks typically compound their earnings steadily so the main risk is overpaying for those attributes.

Europe’s most popular stocks dramatically rerated 2019-21 – and have steadily derated since
Valuation re/de-rating of basket of 7 wonders of Europe
Europe’S Most Popular Stocks Dramatically Rerated 2019 21 – And Have Steadily Derated Since
Source:Polar Capital; August 2025. Forecasts contained herein are for illustrative purposes only and does not constitute advice or a recommendation.

The derating of quality stocks has seen their rolling five-year returns fall to the lowest levels outside the global financial crisis (see chart below). Quality stocks typically make high returns on equity and generate double-digit total shareholder returns, so a rolling five-year return of 5% reflects a significant valuation derating, offsetting the strong underlying fundamental compounding power. This is why quality stocks have historically bounced from these levels, their underlying compounding eventually outweighs any derating headwinds. It is also striking how much worse the rolling returns have been for quality than the overall index – by far the worst they have performed in the past 20 years.

Rolling 5-year total return for MSCI Europe Quality Index and Stoxx Europe 600
Rolling Quality Return Chart
Source: Polar Capital; 29 August 2025.

What we are doing in our portfolio

Our investment approach is driven by our watchlist. We constantly compare the stocks in the portfolio to the stocks on our watchlist – competition for capital drives our investment process. Most of the stocks on our watchlist meet our minimum quality criteria (10% return on equity through the cycle), but not our valuation criteria (we look to buy stocks on more than a 4% free cashflow yield).

It felt uncomfortable when our valuation discipline prompted us to sell some of these high- quality stocks on valuation grounds as they rerated in 2018 and 2019. However, this was ultimately the right approach as many of these stocks went on to materially underperform. We see the opposite situation today – it is uncomfortable buying quality stocks with poor price momentum, but many of these stocks are compelling compounding assets (with strong returns on capital employed; excellent moats; track records of double-digit total shareholder returns). There is a relatively high risk that we might be buying too early and a low risk, in our view, that these stocks do not perform handsomely on a three to five-year view given their underlying returns on equity and compounding earnings.

We strongly argue for a selective approach to picking quality laggards. The quality stocks we have been buying over the past year (see chart below) have seen an even more dramatic derating than the high-profile basket of stocks in our first chart. These stocks are now materially cheaper than they were even in 2015, a point from which their compounding characteristics generated excellent outcomes.

Our preferred quality stocks look very cheap compared to their histories
Valuation re/de-rating of our recent quality purchases made in the last year
Our Preferred Quality Stocks Look Very Cheap Compared To Their Histories
Source: Polar Capital; August 2025. Forecasts contained herein are for illustrative purposes only and does not constitute advice or a recommendation.

The volatility of markets since last summer has presented plenty of opportunities to buy good companies that are temporarily out of favour (see table below). We are looking for companies that can deliver total shareholder returns (dividend yield plus earnings growth) of at least 10%. Many of these stocks are likely to be able to deliver low teens levels of total shareholder returns.

We have been steadily finding quality stocks that meet our valuation criteria
We Have Been Steadily Finding Quality Stocks That Meet Our Valuation Criteria
Source: Polar Capital; August 2025.

We think our Fund offers a differentiated approach for investors. Our investment process of looking for good companies when they are out of favour keeps us out of the weakest and most overvalued stocks. The core of our investment process is to seek out the right combination of quality and value. The combination of steady earnings and reliable dividend income helps the Fund act as a defensive anchor. When multiple expansion is not lifting prices, the quality and growth of underlying earnings and cashflows become the primary driver of returns. We own businesses that generate real, compounding value, not ones that benefited from expanding investor enthusiasm.

The Fund’s cumulative return composition
Fund Cumulative Return Composition
Source: Polar Capital; August 2025.

Conclusion

The current market backdrop is presenting unusual opportunities to buy Europe’s quality stocks at a discount to their long-term valuations. In a world of tariffs, central bank interest rate cuts and macroeconomic risks, we think many of these oversold quality stocks offer extremely compelling valuation opportunities.

Related Fund

Risks

  • Capital is at risk and there is no guarantee the Fund will achieve its objective. Investors should make sure their attitude towards risk is aligned with the risk profile of the Fund before investing.
  • Past performance is not a reliable guide to future performance. The value of investments may go down as well as up and you might get back less than you originally invested as there is no guarantee in place.
  • The value of a fund’s assets may be affected by uncertainties such as international political developments, market sentiment, economic conditions, changes in government policies, restrictions on foreign investment and currency repatriation, currency fluctuations and other developments in the laws and regulations of countries in which investment may be made. Please see the Fund’s Prospectus for details of all risks.
  • The Fund invests in the shares of companies and share prices can rise or fall due to several factors affecting global stock markets.
  • The Fund uses derivatives which carry the risk of reduced liquidity, substantial loss and increased volatility in adverse market conditions, such as failure amongst market participants.
  • The Fund invests in assets denominated in currencies other than the Fund's base currency. Changes in exchange rates may have a negative impact on the Fund's investments. If the share class currency is different from the currency of the country in which you reside, exchange rate fluctuations may affect your returns when converted into your local currency.


Important Information:
This is a marketing communication and does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments. Any opinions expressed may change. This document does not contain information material to the investment objectives or financial needs of the recipient. This document is not advice on legal, taxation or investment matters. Tax treatment depends on personal circumstances. Investors must rely on their own examination of the Fund or seek advice. Investment may be restricted in other countries and as such, any individual who receives this document must make themselves aware of their respective jurisdiction and observe any restrictions.

A decision may be taken at any time to terminate the marketing of the Fund in any EEA Member State in which it is currently marketed. Shareholders in the affected EEA Member State will be given notification of any decision and provided the opportunity to redeem their interests in the Fund, free of any charges or deductions, for at least 30 working days from the date of the notification.

Investment in the Fund is an investment in the shares of the Fund and not in the underlying investments of the Fund. Further information about fund characteristics and any associated risks can be found in the Fund’s Key Information Document or Key Investor Information Document (“KID” or “KIID”), the Prospectus (and relevant Fund Supplement), the Articles of Association and the Annual and Semi-Annual Reports. Please refer to these documents before making any final investment decisions. These documents are available free of charge at Polar Capital Funds plc, Georges Court, 54-62 Townsend Street, Dublin 2, Ireland, via email by contacting Investor-Relations@polarcapitalfunds.com or at www.polarcapital.co.uk. The KID is available in the languages of all EEA member states in which the Fund is registered for sale; the Prospectus, Annual and Semi-Annual Reports and KIID are available in English.

The Fund promotes, among other characteristics, environmental or social characteristics and is classified as an Article 8 fund under the EU's Sustainable Finance Disclosure Regulation (SFDR). For more information, please see the Prospectus and relevant Fund Supplement.

ESG and sustainability characteristics are further detailed on the investment manager’s website: - https://www.polarcapital.co.uk/ESG-and-Sustainability/Responsible-Investing/.

A summary of investor rights associated with investment in the Fund here.

This document is provided and approved by both Polar Capital LLP and Polar Capital (Europe) SAS.

Polar Capital LLP is authorised and regulated by the Financial Conduct Authority (“FCA”) in the United Kingdom, and the Securities and Exchange Commission (“SEC”) in the United States. Polar Capital LLP’s registered address is 16 Palace Street, London, SW1E 5JD, United Kingdom.

Polar Capital (Europe) SAS is authorised and regulated by the Autorité des marchés financiers (AMF) in France. Polar Capital (Europe) SAS’s registered address is 18 Rue de Londres, Paris 75009, France.

Polar Capital LLP is a registered Investment Advisor with the SEC. Polar Capital LLP is the investment manager and promoter of Polar Capital Funds plc – an open-ended investment company with variable capital and with segregated liability between its sub-funds – incorporated in Ireland, authorised by the Central Bank of Ireland and recognised by the FCA. FundRock Management Company (Ireland) Limited acts as management company and is regulated by the Central Bank of Ireland. Registered Address: Percy Exchange, 8/34 Percy Place, Dublin 4, Ireland.

For UK investors: The Fund is recognised in the UK under the Overseas Funds Regime (OFR) but it is not a UK-authorised Fund. UK investors should be aware that they may not be able to refer a complaint against its Management Company or its Depositary to the UK’s Financial Ombudsman Service. Any claims for losses relating to the Management Company or the Depositary will not be covered by the Financial Services Compensation Scheme, in the event that either entity should become unable to meet its liabilities to investors. For information on the complaint process to the Management Company, please see the Country Supplement for this fund available at https://www.polarcapital.co.uk/

Benchmark: The Fund is actively managed and uses the MSCI Daily Net Total Return Europe Ex UK Index as a performance target. The benchmark has been chosen as it is generally considered to be representative of the investment universe in which the Fund invests. The performance of the Fund is likely to differ from the performance of the benchmark as the holdings, weightings and asset allocation will be different. Investors should carefully consider these differences when making comparisons. Further information about the benchmark can be found here. The benchmark is provided by an administrator on the European Securities and Markets Authority (ESMA) register of benchmarks which includes details of all authorised, registered, recognised and endorsed EU and third country benchmark administrators together with their national competent authorities.

Third-party Data: Some information contained herein has been obtained from third party sources and has not been independently verified by Polar Capital. Neither Polar Capital nor any other party involved in or related to compiling, computing or creating the data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any data contained herein.

Country Specific Disclaimers: Please be aware that not every share class of every fund is available in all jurisdictions. When considering an investment into the Fund, you should make yourself aware of the relevant financial, legal and tax implications. Neither Polar Capital LLP nor Polar Capital Funds plc shall be liable for, and accept no liability for, the use or misuse of this document.