BlackRock is maintaining an overweight to European assets, citing enhanced credit yields, strong sector performance and growing appeal for dollar-based investors amid shifting US monetary policy.
The latest update from the BlackRock Investment Institute said the asset management giant’s long-standing overweight to US equities remains intact, but recent rate cuts by the Federal Reserve and a weakening dollar have sharpened the focus on opportunities overseas. This is especially the case in Europe, where income and valuation advantages are beginning to outpace the US.
In fixed income, BlackRock has a preference for euro-denominated investment-grade credit over US equivalents. While the European Central Bank has kept policy rates steady at 2%, well below the Fed’s 4.00-4.25% range, this rate gap has created favourable conditions for US investors who hedge their euro bond exposure back into dollars.
The result is a significant increase in income. According to BlackRock, euro investment-grade credit now yields close to 6% on a hedged basis, offering higher returns than US investment-grade corporate bonds.
This reflects not only the benefit of currency hedging but also the tighter spreads and greater creditworthiness seen in Europe’s corporate bond market. BlackRock noted that credit stress remains concentrated among smaller issuers and that large European corporates continue to demonstrate resilience, despite an uptick in global default rates.
BlackRock’s strategists added: “We close our long-held relative preference for peripheral euro area government bonds over the core. Stronger growth in Spain and Greece and relative political stability in Italy had driven yields down relative to French and German yields more than a decade after the region’s debt crisis. But yields and spreads now reflect that stability, in our view.
“France is facing political gridlock stymying efforts to trim debt, while Germany has embraced looser fiscal policy this year. But we think a lot of the risks in French bonds are priced in with their 10-year yields above those in Spain by the most since the euro was launched.”
In equities, BlackRock acknowledged that Europe’s outperformance relative to the US peaked earlier in the year. However, the firm remains focused on “granular opportunities” across specific sectors and geographies that it has liked since the start of 2025.
Financials, industrials and utilities have all outperformed their US counterparts year-to-date, returning 32%, 21% and 19% respectively, according to data from LSEG. BlackRock attributed this to structural factors such as improved balance sheets in financials, rising infrastructure and defence spending in industrials and the continent's growing engagement with artificial intelligence themes.
“By country, we prefer Spanish equities where these sectors are well represented. As another plus, Spanish equities have greater exposure to emerging markets, especially Latin America, that can benefit from easier Fed policy and potential further US dollar weakness,” the firm’s strategists said.
“We think relative valuations still do not reflect the country’s stronger economic growth and earnings compared with the rest of Europe – and see further upside.”
The recent resumption of interest rate cuts in the US has also influenced BlackRock’s global allocation strategy. A weaker dollar has made foreign assets more attractive, both in terms of income and diversification.
BlackRock sees this as a tailwind for international portfolios, particularly for investors based in the US, who now benefit from both the hedging premium in European fixed income and the potential for currency-driven equity gains. This shift in relative attractiveness underscores the firm’s view that global diversification is becoming more compelling in the current policy environment.
Despite the growing interest in non-US assets, BlackRock has not altered its stance on US equities. The firm continues to view artificial intelligence (AI) as a powerful near-term and long-term driver of earnings and productivity growth.
While policy volatility and supply-side constraints may temporarily weigh on US growth, BlackRock believes the structural impact of AI will continue to support corporate performance, particularly in the technology and services sectors. This conviction underpins the firm’s confidence in the sustainability of US market leadership.
On the fixed income side, BlackRock has moved away from US investment-grade credit, citing tight spreads and reduced relative value. Instead, the firm prefers developed market government bonds outside the US, as well as short-term inflation-linked bonds that may offer protection against renewed inflation pressures from tariffs and supply bottlenecks.