The European opportunity:
- Rapid profit growth has driven big returns for investors: In the 10 yrs 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.
- The pandemic hit smaller companies hard: European smaller company profits tumbled 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.
- But the 2021 rebound was dramatic: 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.
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