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European small caps to accelerate ahead of larger peers

Long thought to be sluggish and ‘old world’, one manager argues the region is producing dynamic and innovative businesses

The European Smaller Companies Trust (ESCT) has posited in a new report that the profit growth for small firms on the continent is set to be twice as fast as their large-cap peers.

According to ESCT, in the decade running up to the end of last year, European smaller companies have quadrupled an investor’s money (+301%), turning £100 invested into £401. This is one fifth better than UK smaller companies which have returned 258% – turning £100 invested into £358.

Finding Tomorrow’s Winners, the 12-page report, says that smaller companies are very attractive to investors since they grow more quickly, do not command premium prices, and are under researched.

This, said Ollie Becket, portfolio manager for the firm, means that it is easier to find ‘the hidden gems’.

He added: “The European economy is often criticised for being sluggish and ‘old world’, but the universe of smaller companies proves that the region is producing dynamic and innovative businesses that can generate significant returns for investors. European small caps are especially diverse, with more than two thousand companies in a huge range of industries spread right across the continent. Many of them come out of family businesses whose managers are real experts in their field and they have been prudently managed with very little debt, helping keep the risks lower.”

The report refers to the difficulties suffered by smaller firms during the pandemic. It said while smaller companies were brutally hit in the first year, their recovery in the second has been far more dramatic than expected.

Becket added: “When the final tally of 2021 results is in, we expect them to have almost made up for the ground lost in 2020. For the year ahead, smaller companies in Europe will produce growth roughly twice as fast as their larger counterparts and are set to outperform growth rates among smallers in the UK and US too.”

That said, Becket did acknowledge that there were some clouds on the horizon around Russia and its invasion of Ukraine.

He said: “The events unfolding in Ukraine will of course have knock-on effects on the economy in Europe and around the world. This means consensus expectations for short-term growth come with a health warning, and uncertainty means market conditions are unusually volatile. But the long-term picture is unclouded.”

There were some bright spots, he added, citing the EU’s NextGenerationEU, a development that we have touched on here in Expert Investor.

The report was put together by Janus Henderson Investors, which reportedly analysed share prices, earnings data, company market capitalisations and valuation metrics for 3,256 large and small companies listed on European stock exchanges and the LSE.

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