Spanish politician Josep Borrell recently stepped down as vice president of the European Commission. To mark the end of his five-year term, he announced the publication of a book entitled ‘Europe in ‘the Arc of Fire’’.

The tome consists of blogs, speeches and op-eds from a year “defined by multiple conflicts and crises”. Borrell wrote: “The events we have had to face during the last several months have confirmed… Europe is in danger.”

He has a point, of course. As the tragedy in Ukraine continues to unfold, war remains on Europe’s doorstep. Leading lights such as France and Germany are embroiled in political upheaval. Populism and nationalism are again on the rise, threatening fragmentation.

Meanwhile, the president-elect of the US can hardly get through a day without invoking the prospect of swingeing trade tariffs. In tandem, another of Europe’s key export markets, China, is struggling to reinvigorate its own economy.

So where does all this leave Europe from an investment perspective? The answer very much depends on the kind of view we adopt in seeking to identify opportunities.

It might be easy to infer, as Borrell does, that the region is in peril. But if we look beyond the bigger picture we find the investment case for many European businesses is unaffected – and perhaps even enhanced.

Proven resilience

In particular, the appeal of smaller companies is likely to become much clearer when we examine Europe at a more granular level. Many of these businesses have already thrived in challenging conditions.

Take Sarantis. Headquartered in Greece, it produces an extensive range of consumer goods, has carved out a strong presence across Europe and encounters only negligible competition from global brands.

Its future was not always so promising. In 2009, for example, its share price tumbled amid the turmoil of the Greek government debt crisis – but the company’s solid fundamentals allowed it to emerge from the tumult and embark on a new growth story.

Many European smaller companies have a similar profile. They are not overly reliant on the US, China or other overseas markets. They are not at the mercy of Donald Trump’s whims, Beijing’s travails and what the European Commission has described as “markedly weaker import demand”.

Some of these businesses have survived the eurozone crisis, Brexit, the Covid-19 pandemic and other shocks. They have also demonstrated their resilience in the face of rampant inflation and mounting costs.

This highlights the importance of focusing on quality companies that have their own capacity for growth. On the whole, the capacity for growth of the regions or countries where they are based is likely to be of somewhat less significance.

Hidden gems

If they are so considerable, why are the attractions of these businesses not more widely acknowledged? The simple explanation is that many European companies receive scant attention from investment analysts.

This is unlikely to be an issue for those in the upper reaches of the market-capitalisation spectrum. Large-caps are usually ‘eyeballed’ by a reasonable number of analysts – probably over 20 – at all times.

But a European business in the lower reaches of the spectrum is likely to be covered by only a handful of analysts. According to our own research, the average for small-caps is four – and the average for micro-caps is just one.

As a result, most investors know next to nothing – or, indeed, nothing whatsoever – about these companies. They have never even heard of them, let alone developed a grasp of what might set them apart.

Equally, most fund managers are ignorant of the opportunities that exist in this arena. By any standard, it is a corner of the investment universe which seldom registers on the majority of radars.

This is good news for investment teams that conduct analyses of their own. In our experience, direct engagement with businesses’ management is key to unearthing hidden gems that may possess genuine potential.

Short-term noise, long-term promise

None of this is to imply investors in European companies should pay no heed to what is happening in the US, China or anywhere else. The bigger picture is the backdrop against which we must all operate, after all.

Yet how geopolitics and geo-economics might impact Europe or its constituent countries is not the be-all and end-all of informed investment decisions. What really matters is how they impact specific businesses.

We hold in our fund several European companies that export to China and/or the US. They currently report demand in the former as slow. Along with the rest of the world, they await developments regarding the latter.

Crucially, we also hold many businesses – mainly small-caps – that have little or no exposure to these markets. This reflects the imperative of diversifying investments across multiple dimensions in order to reduce risk.

Take a long-overdue look at these companies, at least right now, and you may think their share prices are rather low. This should not be misinterpreted as a cause for alarm, especially when there is so much noise with which to contend.

Despite the European Commission’s justifiable concerns, the reality is that these businesses are not cheap because Europe is “in danger”. They are cheap because they are undervalued – and they are undervalued because so few investors recognise their proven ability to deliver success over the long term.

David Walton is manager of the IFSL Marlborough European Special Situations fund. The views expressed above should not be taken as investment advice.