Think about investing in Europe, and the chances are your mind will turn to Roche, Nestle, Total, Volkswagen – the long-established continental giants that typically have a strong presence in conventional European portfolios.
But Europe is awash with smaller, more niche businesses too, and it’s in this often-overlooked part of the market that many of the most compelling structural growth stories are to be found by those who know what they’re looking for.
The long-term case for European small companies is a powerful and longstanding one. Over the 25 years from 2000 to end March 2026, the MSCI Europe Small Cap index has risen in value by more than 700% – outpacing the MSCI indices for emerging markets, the main Europe market and Asia, as well as the FTSE 250 and the S&P 500.1 While the long-term returns have been compelling, it’s worth remembering that smaller companies can experience greater share price volatility than their larger counterparts, particularly over shorter time periods.
Indeed a host of wider macroeconomic issues, including the fallout from the Ukraine invasion, US tariff imposition and heightened global geopolitical uncertainty, have combined to deter nervous investors from small companies in Europe (and elsewhere).
As a consequence, valuations for European small caps have suffered as investors have turned their backs on the sector. At the end of December 2025, the cyclically adjusted price/earnings (CAPE) ratio (which indicates whether a market is over- or undervalued relative to its history, or to other markets) had fallen from a 20-year average of more than 17x to 15.7x.2
That’s a significant drop, and it suggests it could be an attractive opportunity to buy into a historically strongly performing market.
It’s also worth noting in this context that small companies in Europe are much more heavily oriented towards the regional domestic market and less dependent on international earnings than their larger counterparts.
Thus, almost 60% of revenues from the MSCI Europe Small Cap index come from Europe, compared with about 30% for the wider MSCI Europe index.3 This makes them less vulnerable to President Trump’s unpredictable tariff regime, and better placed to benefit from Germany’s economic reform programme and broader boosts to government defense budgets.
Moreover, the indications are that the macroeconomic headwinds that have worked against small caps in recent years are shifting. Inflation has stabilised in Europe, monetary policies are easing, and consumer confidence is gradually returning. Such positive trends tend to support European small companies’ performance, and indeed the signs are that investors are returning to Europe more generally.
Strength in small caps
So there is an interesting backdrop to the case for European small companies. And that case strengthens when we consider the extraordinary performances that many have achieved in the last couple of decades.
Over the 20 years to end 2024, more than 50 European small caps have increased in value tenfold; the most successful, Swedish software specialist Fortnox, has seen an almost 300-fold rise in its value (with dividends reinvested) since its IPO in 2007.4
In the process, many of these enterprises have grown from small cap to large cap status, German semiconductor expert ASML being a prime example. Its value rose 86-fold to €5bn over that 20-year period.4
Gains of such magnitude have been possible in part because many of the most attractive small businesses have been - and continue to be – under-researched by investment analysts, making it possible for those professional investors who know exactly what they are looking for to mine a rich seam of ‘undiscovered gems’.
So which sectors are catching the eye of experienced stockpickers, such as the portfolio managers of JPMorgan European Discovery Trust (JEDT)?
The team (made up of Jon Ingram, Jules Bloch and Jack Featherby), is excited about the potential offered by future-facing sectors including decarbonization and healthcare innovation, as well as digitalisation. But it also sees excellent opportunities as more government funds flow into structural growth areas such as infrastructure investment and defence spending.
For example, JEDT holds SPIE, a profitable and well-balanced French industrial engineering enterprise currently trading on a substantial discount to industrial peers.
More than four fifths of SPIE’s business is related to smart city and energy transition/efficiencies, so it is strongly placed to benefit from the European electrification theme as governments transition to cleaner energy supplies. Moreover, as the JEDT team points out, energy efficiency projects are becoming increasingly complex, which creates barriers to entry for newcomers.
Another holding set to gain from policy stimuli is Bilfinger, a well-managed mid-cap German industrial stock that does most of its business in Germany and should benefit from the government’s infrastructure spending plans.
Defence spending has also come to the fore in recent years, in the face of geopolitical pressures. As Jules Bloch explains: “When it comes to defence, governments tend to support domestic companies; among our preferred stocks is Spanish defence contractor Indra Sistemas, which looks attractive given Spain lags far behind its NATO spending commitment.”
Europe is changing rapidly in response to a range of powerful pressures - technological, climate-related, economic and geopolitical - and that’s creating great opportunities for small businesses. The JEDT team’s rigorous, disciplined and forward-facing approach to stock-picking in this under-analysed part of the market enables it to move with the times.
Its success is reflected in impressive performance over both the short and the long term with share price and net asset value total returns ahead of the MSCI benchmark index over 1,3,5 and 10 years.5
European smaller companies are a compelling story in 2026, and JEDT offers investors exposure to a ready-made portfolio of carefully selected businesses with the potential to benefit from structural growth trends across Europe.
The securities above are shown for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell.