In a comprehensive research report, The European Smaller Companies Trust examine the results of over 3,000 companies across Europe and the UK in order to assess the historic performance, contemporary landscape and long-term outlook for smaller European companies – by Ollie Beckett, Portfolio Manager


Key Takeaways


  • European smaller companies have returned 893% to investors in the last 20 years, compared to 195% for the FTSE 100
  • Information asymmetry for smaller companies can lead to mispricing, which affords active managers greater scope for finding hidden gems
  • European smaller company median price/earnings ratio is 20.7x, only slightly higher than large caps, but for much more growth
  • Smaller companies have access to a diverse range of sectors, themes and geographies


Smaller-company profits across Europe have regained pre-pandemic highs and are set for further growth, according to a major study from The European Smaller Companies Trust (ESCT) into the results of over 3,000 companies across Europe and the UK.


The pandemic hit smaller companies hard


The impact of the pandemic in 2020 was severe, causing European smaller company profits to tumble from a collective £46.6bn in 2019 into a loss of £2.3bn in 2020. Nevertheless, the majority remained profitable. Only one company in five booked a loss, however. By comparison, one in six large European companies also fell into losses in 2020 and the total profit impact was smaller – down 42%. UK top 100 profits fell 85%, with one in ten making a loss.



The 2021 rebound was dramatic


The 2021 results are now in from almost half of European smaller companies. By the time all of these companies have reported, The European Smaller Companies Trust estimates that their combined profits will reach £44bn. Trading in the first quarter of 2022 has brought further growth, taking profits back above the 2019 peak, according to ESCT estimates.

Large European company profits have also exceeded pre-pandemic highs, reaching £277bn in 2021, but UK top 100 profits will take longer to recover.


The longer-term picture shows very rapid growth


Between 2013 and 2019 (respectively the first full year of recovery from losses made during the Eurozone crisis and the pre-pandemic peak), smaller company profits grew almost seven-fold from £6.9bn to £46.6bn. Over the same period, large European companies saw their profits grow by two thirds from £145.2bn to £243.6bn. Profits from the UK FTSE 100 grew at the same pace as their large European peers, up from £48.6bn to £80.4bn.


esg investing


The Outlook


Before the war broke out in Ukraine, consensus expectations were for European smaller companies to grow their earnings by 25.5%, almost twice as fast as large companies in Europe and the UK. This is also faster than smaller company peers in the US and UK too (18.0% and 19.8% respectively). This suggests total European smaller company profits could top £54bn this year. However, ESCT expects the war to dampen profit growth this year for many companies of all sizes, so analyst forecasts are likely to be reduced somewhat. 


Rapid profit growth has driven big returns for investors


In the ten years to the end of 2021, 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. It is also significantly faster than large European companies (194%) and much better than the UK top 100 (+94%). Share prices, however, have suffered in 2022 from rising concerns over inflation and the war impact.

Despite superior long-term returns, smaller companies are inexpensive

Investors do not have to pay a significant premium for such dramatically faster profit growth, or for the superior long-term returns. Comparing share prices to profits using the P/E ratio shows that smaller European companies are only a tenth more expensive than their slower-growing large-cap peers. Measures that look at asset values (such as the price/book ratio) show that smaller companies are valued lower than larger ones (2.5x v 2.6x for European large cap and 2.7x for UK top 100).


(source: Janus Henderson)

2022 P/E – median

EMIX Smaller European Companies Ex-UK


European Large Cap Ex-UK


FTSE 100



Ollie Beckett, Portfolio Manager, The European Smaller Companies Trust said:


As the research shows, smaller companies tend to grow much quicker than their larger counterparts and are able to do so without commanding premium prices. They are also often under-researched which means that, with active management, there is far greater scope for finding those hidden gems.

It’s all about finding niche leaders – the companies that are providing specific solutions to current and future problems, and delivering growth whilst they do it. The European economy has been criticised for being sluggish, but the universe of smaller companies continues to produce dynamic and innovative businesses that are well-placed to benefit from a range of different contextual factors, such as the energy transition or the changing healthcare landscape.

“The tragedy 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. And it is the long term that drives returns.”



Read the full report here: The European Smaller Companies Trust: Finding tomorrow’s winners – Janus Henderson Investors


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