Summary
Europe’s SMID companies stand out in 2026,combining attractive valuations, improving fundamentals and persistent under-ownership versus the US.
Headwinds are easing, with tariff impacts rolling off, softer comparatives and a weaker US dollar improving visibility for European exporters and margin recovery.
Opportunities remain bottom-up, with supportive fundamentals clustering in Spain, Ireland and an improving Germany — not driven by macro calls but by stock-specific strength.
Portfolio companies combine resilience and self-help, with strong balance sheets, pricing power and accretive M&A, while wide valuation gaps continue to support SMID takeover activity.
Outlooks can have a tendency to be vague, but our conviction is strong: we think Europe remains one of the most under-valued and under-owned regions in global equities. Over the past few years, investor attention has been firmly centred on the US, where large-cap technology and AI themes have dominated flows and headlines. That concentration has left Europe overlooked, even as many of its companies have quietly rebuilt balance sheets, streamlined operations and positioned themselves for recovery.
But what we are starting to see now, in our view, are early signs of re-engagement. Investors are beginning to revisit the region, questioning whether it makes sense for so much of their equity exposure to sit in one market. With valuations still at a meaningful discount and the recovery broadening across countries and sectors, we believe the setup for 2026 looks increasingly constructive for Europe − particularly in the small- and mid-cap (SMID) part of the market, where valuations and fundamentals have diverged most meaningfully from the US.
The big story for 2026
We continue to see the strongest bottom-up opportunities within European small and mid-caps (SMID). This is where valuation support and earnings recovery come together most clearly. European small caps are trading at 13.4x earnings, compared with 14.6x for Europe large caps, 19.7x for US small caps and 24x for US large caps (MSCI data to 25 November 2025). Many SMID businesses have faced a difficult few years − from supply-chain shortages and inflation spikes to tariff disruption and currency swings − and have emerged stronger for it.
We think 2026 could mark the point where several of those headwinds begin to ease. Companies that were hurt by tariffs in 2025 have softer comparatives and may start to recover margins as trade flows stabilise, while a softer US dollar should support European-based exporters and ease input costs. Because many European businesses hedge currency exposures in advance, these benefits are likely to come through gradually over the year, improving visibility and profitability.
The opportunity, however, is not uniform across the market. Europe’s recovery remains uneven, which creates scope for genuine stock picking. While we don’t set regional views, we are seeing particular strength in parts of Europe’s periphery − notably Spain and Ireland ─ and signs of recovery in Germany. Spain’s growth remains robust, supported by business-friendly regions, steady inward migration and low energy costs, thanks to renewables expansion. Ireland continues to benefit from sound public finances, a young, English-speaking workforce and exposure to technology and healthcare clusters. In Germany, industrial activity is stabilising and we are positioned for a cyclical upturn as demand normalises. These are not top-down calls but themes that have emerging from the bottom-up.
Risks and resilience
We are always cautious about predicting macro outcomes. The reality is that inflation, rates and growth can all surprise in either direction. Rather than making forecasts, we focus on the resilience and adaptability of individual businesses. We prefer companies with strong balance sheets, good pricing power and management teams that can adjust quickly.
One area that does give us pause is the level of complacency embedded in US equities. Valuations remain elevated and ownership concentrated, with retail exposure now higher than it was at the top of the dot-com boom. Much of the market narrative hinges on AI-related capital expenditure, but the scale of that spending ─ and how it will be funded − raises questions. We are also seeing a build-up of leverage in private markets, particularly across unprofitable companies in the AI and technology ecosystem. Those are not immediate concerns for Europe, but they do reinforce the importance of selectivity and valuation discipline.
For us, the key is to stay invested in businesses that can make progress regardless of the macro backdrop ─ companies with visibility, self-help potential and the ability to “make their own weather”.
Positioning and opportunity
Our portfolios are positioned to capture the recovery we see across different parts of the region. Exposure to Germany, Spain and Ireland gives us leverage to domestic improvements, while many of our holdings stand to benefit directly from the normalisation of tariffs and currency trends.
A common theme for any of our portfolio names is that they drive their own growth through operational self-help. Several have completed small but accretive acquisitions, taking advantage of weaker competitors or niche opportunities to strengthen their positions. These bolt-on deals often create significant synergies and can meaningfully enhance long-term earnings power.
We also expect merger and acquisition activity more broadly to remain a feature of the European SMID landscape. Valuation gaps between large and small companies remain wide, leaving many smaller names attractively priced and, in some cases, vulnerable to takeover. We saw two portfolio holdings acquired in 2025 ─ one in the UK and one in Ireland − and we think this is likely to continue as strategic buyers and private equity look for growth at reasonable prices.
Overall, we think our portfolios are well placed for 2026: focused on cash-generative businesses with strong visibility into next year, and with multiple ways to create value irrespective of the macro environment.
Europe’s next chapter
Europe is still fighting for investor attention, but we believe the tide is starting to turn. The combination of improving fundamentals, attractive valuations and the breadth of opportunity within Europe’s SMID universe provides a compelling backdrop. Importantly, we see many companies capable of delivering progress under their own steam ─ businesses that can, as we like to say, make their own weather.
After a decade dominated by a narrow group of US giants, we think investors will increasingly look for growth in places that have been overlooked. For those willing to venture beyond the obvious, Europe offers a deep and diverse pool of under-appreciated companies entering 2026 from a position of strength.
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