European equities are firmly back on the map. A wave of enthusiasm has rolled over the continent, with substantial improvement in vaccinations, fiscal support, and a sizable valuation discount relative to the US, all providing an attractive macro backdrop for investors. 
One of the great attractions of European smaller companies is that the asset class includes many innovative and dynamic companies that are often leaders in their market niches and/or have high growth prospects that may be underappreciated by the market.
The ongoing pandemic has accelerated this wheel of innovation, reinforcing our need for better healthcare, technology, and we’re also seeing what impact reduced human activity is having on air quality. It is these three key themes – wellness, technology and tackling climate change – where we find many opportunities.
When considering wellness, there is a growing appreciation of the importance of keeping fit and we saw many stories during the pandemic of people wanting gyms to remain open. With many increasingly focused on their health, fitness is a growing industry. We are accessing this trend by investing in Technogym, an Italian manufacturer of fitness equipment for both home use as well as commercial gyms.
Although not always associated with the European market, technology continues to be a dominant investment theme for growth across the continent. The demand for semiconductors is huge and continues to grow. One of the biggest drivers of this growth is the auto sector. One company that has benefited from this trend has been the Dutch manufacturer of semiconductor assembly equipment, BE Semiconductors. Manufacturers are looking at ways of being able to get more power onto microchips and this is exactly what BE Semiconductors provides.
We believe that reducing pollution, plastic and our carbon footprint is key to improved welfare. Europe’s companies are well positioned and should benefit from increased global momentum towards tackling climate change as they are already ahead of the curve on this front. We expect the European green deal to help bolster what is already solid demand for companies that are helping to fight climate change.
We like companies that are likely to help scale the solutions to global sustainability challenges, for example Scatec, the Norwegian renewable energy producer specialising in emerging markets.”
The key to investing in smaller companies is our ability to discover and engage with companies in the early stages of their development, when their growth is the highest. While economies recover and markets remain volatile, we continue to find attractively valued European smaller companies that are leaders in these high growth themes.
Over the long term, European smaller companies have performed strongly relative to other asset classes, due to their superior earnings growth, and we see no reason for this to change. For investors focused on the long term, we believe the asset class continues to offer exciting growth prospects and is well positioned to continue its high growth development.
Francesco Conte is a portfolio manager on the JPMorgan European Discovery Trust. The views expressed above are his own and should not be taken as investment advice.