European SMID: tested and intact

The first half of 2026 put the European small- and mid-cap equity (SMID) investment case to the test. At mid-year, despite the headline volatility, that case remains intact: the European SMID market is overlooked and under-owned, yet supported by compelling valuations.

The clearest evidence is visible at the individual company level. The Iran conflict affected earnings expectations, but the impact has been highly stock specific. Higher input costs, softer consumer sentiment, delayed decision-making and market volatility have undoubtably pressured some companies, but others have managed the environment well. Company feedback has often been more balanced than the macro headlines suggest, with agile businesses moving quickly to secure supply chains and reprice, while more conservative management teams built buffer stock to protect delivery commitments. In many cases, activity levels have been more normal than feared.

That matters because European SMID is too often treated as a single cyclical or risk-on asset class. In reality, the market contains businesses with very different drivers. Some are more insulated because they are domestic or less cyclical, while others offer high visibility on revenues and earnings, or trade with significant scepticism already reflected in their share prices. Many of these companies do not need a dramatic improvement in the macro backdrop to perform well.

This is where the opportunity remains interesting across scenarios. 

We continue to find companies that can perform without relying on a perfect macro environment. Some offer dependable earnings visibility. Others sit in deep value territory, where expectations are already cautious. We are also seeing businesses that are beneficiaries of the disruption, including some with direct energy exposure, or those able to gain share from competitors less able to meet clients’ needs.

The overlooked nature of the asset class comes not only from what the market is pricing, but where investors are focusing their attention. Time horizons have become very short, and investors are treating AI and technology as if they are the only themes that matter.

Even within the specialist tech themes, we think the market is underestimating the breadth of potential SMID beneficiaries. Some companies can use technology to improve service or reduce costs. Others can gain market share through innovation. In periods of significant technological change, smaller and more agile businesses can prove well placed to respond quickly.

The broader opportunity is equally important. Many companies outside the areas currently dominating market attention have been ignored, despite having attractive opportunities of their own. For us, the underappreciated opportunity in European SMID is not a single sector or theme, but the breadth of companies being overlooked because the market’s focus has become so concentrated.

That does not mean abandoning discipline. We remain cautious where expectations are very high and valuations leave little room for disappointment. Some of the hottest parts of the market are pricing in a great deal of future growth, and history shows that, over the long term, the price you pay really matters.

Our positioning reflects that balance. We favour strongly growing companies, deep value businesses with significant scepticism already embedded in the share price, and more dependable companies with very high visibility on revenues and earnings. 

As scenarios unfold and geopolitics change, we will continue to evolve our portfolio. If volatility creates better entry points, we would expect to add selectively where we see attractive long-term upside, strong execution and valuations that do not fully reflect the opportunity. H1 did not break the European SMID case. It showed why breadth, resilience and stock selection still matter.