Five reasons to pay more attention to Europe’s smaller companies
Harry Eastwood outlines five reasons why he believes investors should be increasing their exposure to Europe’s domestic economy via the continent’s smaller companies.
One of the precious few joys of perusing European Commission documents lies in the challenge of spotting inventive means of articulating bad news. Consider, for instance, the deft deployment of the word “gradual”.
In its Spring 2024 Economic Forecast, the Commission predicted “gradual expansion”1. Then in its Autumn 2024 Economic Forecast, it predicted a “gradual rebound”2.
Both of these terms sounds to us like neat euphemisms for low growth. In their own subtle way, they lend weight to the longstanding notion that investors seeking outperformance might be better advised to look elsewhere.
This unflattering lens has led much of the investment community to adopt what might best be described as a narrow view of Europe. The evolution of the MSCI Europe Index over the past 15 years clearly evidences as much. Companies with euro-denominated revenues and companies with non-euro-denominated revenues were just about equally split across the index in 2010. Fast-forward to the present day, though, and we find the latter’s share has risen to around 70%3.
This shift lays bare an increasing fondness for Europe-domiciled global businesses that have no substantive links to the domestic economy. As a general rule, such companies are likely to be found at the higher end of the market-capitalisation spectrum.
Whether such an approach has ever been entirely justified is a moot point. But it’s certainly not an especially bright idea today, because we think exposure to Europe’s domestic economy is now exactly what investors should be aiming for.
Here are five reasons to believe this is the case. Together, they underline why we feel that businesses in the small-to-mid-cap range merit far more attention than they have received in years, if not decades.
1. US exceptionalism’s Trump-induced wobble
The fallout from Donald Trump’s ‘Liberation Day’ announcement on trade tariffs served to temporarily derail US markets’ pre-eminence. Although the S&P 500 index has since returned to its previous high4, the turmoil offered a seismic reminder that diversification still matters.
Long-term outperformance can’t always be found in a handful of US-based tech titans, we would argue. As a result, investors are once again casting their nets more widely – and Europe is back on their collective radar.
2. Europe’s emergence from fiscal conservatism
As well as shaking up markets, Trump’s second spell in the Oval Office has reignited the debate over Europe’s strategic relationship with the US. NATO members’ recent commitment to defence spending of at least 5% of GDP by 2035 illustrates a potentially epochal move towards less reliance on the ‘leader of the free world’5.
More broadly, a prolonged period of fiscal conservatism appears to be drawing to a close. Most notably, Germany’s new stimulus package – approved in March, even before the tariff tumult struck – includes a €500 billion infrastructure fund and higher borrowing limits for federal states6.
3. Growing grounds for confidence in the south
The European sovereign debt crisis began in the late 2000s. Its effects lingered well into the 2010s for many nations in southern Europe, for which the road back has been both lengthy and challenging.
Today, finally, there are genuine signs that these countries have regained a relatively firm footing. In light of significant deleveraging, banks have become more willing to engage in substantial lending. Growth, consumption and income rates in some southern economies have been superior to those in the north7.
4. Smaller companies’ proven outperformance
In Europe, as in most regions, smaller companies have a record of outperforming their larger counterparts over time. For example, according to Morningstar data, European small-caps returned 457% between the start of 2001 and the end of 2024, compared with 153% for large-caps8.
Naturally, the big boys have held sway occasionally, including in the immediate aftermath of the Covid-19 pandemic. However, as in the US, their performance has often been driven by a tiny number of businesses – some of which, such as Danish healthcare company Novo Nordisk, have since dramatically fallen out of favour.
5. It was never all bad news
The European Commission may have meekly touted “gradual expansion” and a “gradual rebound”, but this is because it must speak for the region as a whole. The reality – in our view – is that there have always been attractive pockets of growth in Europe, provided you know where and how to find them.
Assessing opportunities on a company-by-company basis is key, we believe. Today, arguably more so than for many years, this is how investors can move beyond the knee-jerk leaning towards international players and instead identify strong, domestically focused businesses capable of flourishing over the long term.
2Source: European Commission: https://economy-finance.ec.europa.eu/economic-forecast-and-surveys/economic-forecasts/autumn-2024-economic-forecast-gradual-rebound-adverse-environment_en
3Source: Artemis, MSCI
4Source: Google Finance, data to 24 July 2025
5Source: BBC News: https://www.bbc.co.uk/news/articles/cj4en8djwyko
6Source: Reuters: https://www.reuters.com/world/europe/german-upper-house-parliament-expected-clear-huge-spending-package-2025-03-21/
7Source: Eurostat: https://ec.europa.eu/eurostat/web/products-euro-indicators/w/2-28012025-ap
8Source: Morningstar as at 30 April 2025