European micro-caps are showing signs of a resurgence after several years trailing their large company peers. Macroeconomic tailwinds, the ongoing global rate-cutting cycle, low valuations and improving market sentiment are setting the stage for a long-term revival in this overlooked segment of the equity market, according to Berenberg’s July 2025 Spotlight report.
The most profitable European small and micro-cap stocks have outperformed large caps over the long term, primarily because their structurally higher earnings-per-share (EPS) growth compounds more powerfully over multi-year periods – but over the past few years they have struggled amid global uncertainty and investor preference for scale and liquidity. However, there are early signs that their period out of the spotlight is over.
In the first half of 2025, European micro caps returned 9.7%, while large companies gained 8.2%. The Berenberg European Micro Cap fund, meanwhile, posted a 14.1% return, beating its MSCI Europe Micro Cap index benchmark by over four percentage points.
This performance is not just a statistical rebound; it reflects a broader shift in market dynamics. Capital is flowing back into European equities, economic indicators are improving, and market breadth is expanding—more than half of European stocks with market capitalizations between €60m and €6bn are now trading above their 100-day averages, as at the end of June.
One of the most compelling arguments for micro caps today is valuation. Relative to large caps, European small and micro caps are trading at historically steep discounts, particularly on forward price-to-earnings ratios. While this gap has narrowed slightly, it remains wide by historical standards, offering a potential entry point for long-term investors. Notably, the discount is no longer just a value trap. Order backlogs, sales and margins are starting to improve as the post-recession environment normalises, giving the rerating a solid fundamental base.
Other key drivers of the trend reversal include:
- Monetary policy is also playing a supportive role. The global rate-cutting cycle, combined with fiscal stimulus measures such as Germany’s recently adopted package, is lifting sentiment and economic indicators across the eurozone. Historically, such environments have favoured smaller companies, which tend to be more sensitive to economic inflections.
- Another encouraging sign is the reversal in capital flows. For the first time since 2022, European equity funds are seeing net inflows, particularly in Germany. While the small- and micro-cap segment has not yet seen consistent inflows, the trend is stabilising, suggesting institutional confidence is gradually returning.
- Market breadth is also improving. Gains are no longer concentrated in a narrow set of sectors like banks and defence; instead, a broader range of industries and countries are participating in the rally. This diversification is a hallmark of healthier, more sustainable market recoveries. Liquidity is improving as well – insiders and local specialist investors are the main buyers so far, while large global institutions remain cautious.
Fine tuning the portfolio
To take advantage of these changes, we have added financial platforms benefiting from higher trading volumes, such as Greek company Hellenic Exchanges and German business Smartbroker, to the Berenberg European Micro Cap fund.
We have also bought companies that are poised to benefit from the German fiscal stimulus, such as semiconductor company Süss Microtec and electronics manufacturer Basler, and favoured European firms with limited US exposure to reduce tariff risk.
Lastly, we have cut exposure to healthcare companies where valuations or growth prospects have become less compelling, including Danish business Chemometec, Surgical Science Sweden and Swedish company Stille.
The fund remains overweight technology, industrials and healthcare, while exposure to banks, insurers and real estate is below the index. This reflects a preference for capital-light, high-return businesses with strong customer retention and operational leverage.
Two stocks for the European micro-cap revival
STIF SA, a French specialist in safety systems for battery storage, is emerging as a global leader in its sector. The company’s protection systems are critical for preventing battery fires in large-scale energy storage projects, often mandated by regulation. With clients including Tesla, Fluence and Sungrow, STIF has established itself as an indispensable partner in the energy sector.
In 2024, STIF quadrupled its operating profit, driven by rapid growth in its energy division, which now accounts for nearly half of its business. The company is expanding geographically, securing major contracts in Asia and maintaining a robust project pipeline. This operational success translated into a remarkable 152% share price increase in the first half of 2025
RaySearch Laboratories, based in Sweden and led by founder Johan Löf, develops advanced software for radiation therapy planning. Its flagship product, RayStation, is widely used in leading cancer centres around the world and is considered the most powerful solution in its market. With consistent organic revenue growth exceeding 15% annually over the past decade, RaySearch has built a loyal customer base and a strong market presence. In the first quarter of 2025, the company reported a 70% year-on-year increase in order intake and more than doubled its adjusted pre-tax profits, exceeding expectations by roughly one third. The share price responded with a 55% gain in the first half of the year.
