The performance of European small and mid caps has been particularly disappointing over the last three years. Small caps have historically outperformed large caps. ” However, this market segment has been going through a complicated period, with disappointing performances over the last three years. This contrasts with the long-term history of this asset class,” admits Nelly Davies, manager at La Financière de l’Échiquier(LFDE).
Undeniable qualities
Yet small and mid caps are not without interest. Most of their sales are generated in their home market or in Europe. However, Europe is once again taking the lead thanks to the stimulus plans announced in several countries. ” These companies are also more flexible and are often run by their shareholders. They generally operate in niche markets with a long-term strategic vision. These companies usually have a higher earning power than the market ,” says Nelly Davies. They also benefit frommarket inefficiencies that help to capture valuation anomalies.
What does the future hold for small and mid caps?
After a discount over the last three years, will these companies surprise us again in 2026? These companies are beginning to recover from the interest rate hikes that penalised them and the slowdown in growth that hurt them. ” Since the end of 2024, domestic profiles have regained a certain appeal. At issue are the customs duties demanded by the United States and the German recovery plan. So, since 2025, we’ve seen a resumption of flows into these stocks,” says the manager. It is therefore undeniable that these stocks remain attractive over the long term. But you’ll have to be patient. Nor should low valuations blind potential investors. ” The US policy on tariffs and renewed confidence in the European economy following the announcement of stimulus plans led to a strong outperformance by domestic stocks, to the detriment of export stocks. This trend could continue and, from this point of view, small caps, which are structurally more domestic, could represent an opportunity. But be careful not to pay too much for growth models and favour a diversified approach, ” advises Nelly Davies.
Sector bias and preferences
However, there are significant sectoral biases in this asset class, such as industrials and tech. La Financière de l’Echiquierthen defined four major themes for exposure to European sovereignty. These include defence and security, with companies active in aerospace, defence and software or IT services. The second theme is energy independence, with a particular focus on renewable energies and services for local authorities. The third theme concerns infrastructure and the transport sector. The steel sector can also be considered as a fourth theme. ” We are also focusing on Germany in particular. Germany’s budget reform is likely to be supported by major investment, and some companies seem well positioned to take advantage of this,” says Nelly Davies. If Europe keeps its promises, this asset class should be back in the black as early as 2026.
