Money managers say rally in Europe's small stocks has just begun

by Margaryta Kirakosian and Michael Msika 

As 2025 kicked off, Michael Oliveros was finding it hard to sell European equities with a smaller market capitalization. 

Investors were piling into larger stocks, in a wager that President Donald Trump’s tariff threats wouldn’t materialize. Economic growth was proving resilient and optimism around corporate earnings had propelled the large-cap Stoxx Europe 600 Index to record highs. 

Some eight months later and Oliveros, head of global small caps at $2 billion asset manager Invesco Ltd., has a far more receptive audience. Sentiment has been flipped on its head as Trump’s erratic trade policies and sweeping tariffs upend the global economic order. 

The Stoxx Europe Small 200 Index has rallied 21% since a low in April that was sparked by Trump’s “liberation day” tariff announcement, compared with a 17% gain in its large-cap counterpart. Higher domestic exposure means it has also benefited from a 13% surge in the euro this year. 

Oliveros’ €793 million ($928 million) Invesco Continental European Small Cap Equity fund has beaten 82% of peers in the past year, with Austrian bank Bawag Group AG, Swedish firm Asker Healthcare Group AB and UK construction materials company SigmaRoc Plc among its biggest holdings. 

“At the beginning of the year, I went on a road show in Germany and not many people wanted to talk about small caps,” Oliveros said in an interview. “Now it is sort of the opposite: everybody’s very interested in having a conversation.” 

He is among a cohort of money managers whose funds have delivered stellar returns for investors looking to avoid trade-induced turbulence by favoring stocks with stronger domestic sales. Spanning sectors from defense to industrials and financials, these small-cap equities are also benefiting from lower interest rates in Europe and cheaper valuations following years of underperformance. 

Over at Alken Asset Management, Nicolas Walewski’s small-cap fund has beaten 99% of peers this year. He has leaned into the boom in defense shares spurred by historic fiscal reform in Germany, buying stocks such as France’s Exail Technologies, which produces inertial beacons used for submarine navigation. The stock is up over 550% in 2025. 

“There is a phenomenal acceleration in their backlog, they have great margins and no capacity constraints,” Walewski said. “It is going ballistic and it is justified.” 

Others are finding value in the infrastructure sector. Benjamin Rousseau, the European small-cap fund manager at Edmond de Rothschild Asset Management, has recently bought shares in Italian firm ICoP SpA, which specializes in underground construction such as pipelines, tunnels and metro stations. 

“The tipping point for me was clearly this trade war,” he said. “Small caps are a very domestic and cyclical asset class. On top of that, you had this massive undervaluation.” 

Enticing Valuations 

Years of trailing behind large-cap stocks amid high interest rates and sluggish economic growth has made small-cap valuations attractive. These shares generally trade at a 20% premium to larger peers, according to data compiled by Bloomberg. In the past two years, though, they’ve been available to buy at a relative discount. 

“People gave up on Europe when it comes to smaller caps,” said Anis Lahlou, chief investment officer of European equities at Aperture Investors. “There are a number of stocks that are very, very cheap in that space, maybe for a reason. But sometimes all it takes is for the landscape to change.” 

Of course, risks to the outlook linger. Global trade policy is far from settled and political leaders are still negotiating a ceasefire in Ukraine. And while European earnings growth has been resilient, it has trailed the performance of US companies. 

“The pressure is on governments to try to create a more growth oriented-environment within Europe,” said Hywel Franklin, head of European equities at Mirabaud Asset Management. “Uncertainty hasn’t completely receded.” 

Those who didn’t have faith in the early stages of the small-cap rally still have scope to get involved if domestic economic growth picks up. European small-cap funds have suffered outflows of $2.8 billion this year through late-July, compared with inflows of $1.1 billion in mid-cap funds, according to data from EPFR Global. 

Earnings estimates also suggest stronger relative growth in European small caps over their larger peers, which isn’t yet reflected in share prices. 

“I don’t think the trade stops here,” Aperture’s Lahlou said. “Where the trend starts to establish itself is when you see the real money from the German stimulus being deployed.” 

© 2025 Bloomberg L.P.