According to reports, European equities have attracted some of their strongest inflows in a decade so far in 2026. The STOXX 600 has been on a roll, and indexes in Germany, France and Italy have been hitting new highs [1].

As the manager of a Europe-focused fund, I might be expected to rejoice at this news. However, although my heart is understandably gladdened, the fact is that I am far from spectacularly moved.

In my experience, one should not get too carried away by headlines – regardless of whether they are positive or negative. It would perhaps be more productive to instead pause, step back and reflect on what Europe’s current resilience might actually mean.

In my opinion, there are three key lessons in particular that can be derived. They are useful for anyone keen to grasp both the bigger picture and the finer details of investing in this region.

1. Politics, economics and market performance are not necessarily linked

By most realistic measures, Europe is not exactly in the rudest of political health at present. Two of the countries mentioned above, Germany and France, have seen their governments collapse within the past year, while in the third, Italy, the ruling coalition is coming under mounting pressure ahead of next year’s elections.

In practically every European nation, as in many other parts of the world, populations are concerned by issues such as international tensions, the cost of living and immigration. While considerable support for the European Union persists, nationalism is once again on the rise.

In tandem, many major European economies are conspicuously strained. Germany is trying to tiptoe towards stabilisation, while lethargic GDP growth and hefty public debt mean financial flexibility in both France and Italy is strictly limited.

So why have numerous markets been doing so well? The explanation lies in large part in a simple truth: many individual companies are likely to prosper or falter in light of their own unique attributes rather than in response to the political and economic events unfolding around them.

2. Concentration risk is not confined to the US and Asia

We can highlight the above point by taking a closer look at the principal drivers of Europe’s performance over the course of 2026 to date. Some of the most substantial contributions have come from traditionally growth-sensitive sectors – for example, miners and industrials – and AI-related businesses, with defence also playing an increasing role [2].

To an extent, this has been the pattern for some years. For instance, when Germany’s blue-chip DAX index soared by 18.7% in 2024, comfortably outstripping the STOXX 600, just seven stocks were responsible for much of the uplift, with software business SAP accounting for nearly 40% of the gains [3].

Naturally, there is something to be said for investing in companies capable of such feats. Yet there is a flip side, which is the threat of concentration risk.

Many investors are well aware of this phenomenon in the US, where the vicissitudes of the so-called “Magnificent Seven” tech titans have occasionally led to precipitous falls – not least in index-tracking funds. Asia’s chipmakers also served up a jarring reminder of the issue in late July. But it is important to note that Europe is by no means immune from the problem.

3. Smaller companies merit more attention

Against this backdrop, smaller companies should not be overlooked. As well as embodying the idea that a business’s own qualities often trump the influence of the broader political and economic environment, they can offer significant diversification benefits at a time when concentration risk is rife.

By way of illustration, take some of my own fund’s best performers over recent months. They have included German commercial vehicle parts manufacturer Jost, Danish electrical wholesaler Solar and Swedish cash-handling company Loomis.

One reason why the attractions of many businesses like these are underappreciated is that such companies tend to be the subject of scant research. Most consistently escape the attention of the investment analyst community, as a consequence of which they rarely – if ever – register on the average investor’s radar. In addition, because they are in sectors that have fallen out of favour, some are routinely dismissed as suspiciously cheap.

The result is that many investors regularly miss out on hidden gems that are characterised by quality, good management and proven processes and practices. This is why there is usually much to be said for moving beyond the headlines – worthwhile though some of them may be – and adopting a truly granular approach to identifying what in many cases turn out to be Europe’s real engines of both resilience and, crucially, long-term growth.

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[1] See, for example, Bloomberg: “Resilient Europe turns into a winning bet for money managers”, August 11 2026 – https://www.bloomberg.com/news/articles/2026-08-11/resilient-europe-turns-into-a-winning-bet-for-money-managers

[2] Ibid

[3] See, for example, Financial Times: “Germany’s own ‘magnificent seven’ help Dax defy bleak growth outlook”, December 24 2024 – https://www.ft.com/content/9dbc774c-96c6-467b-bb67-8b3f8a538a3b

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‍David Walton is manager of the IFSL Marlborough European Special Situations Fund.

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Find out more about the Marlborough European Special Situations Fund

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This article is provided for general information purposes only and should not be construed as personal financial advice to invest in any fund or product. These are the investment manager’s views at the time of writing and should not be construed as investment advice. The opinions expressed are correct at time of writing and may be subject to change. Capital is at risk. The value and income from investments can go down as well as up and are not guaranteed. An investor may get back significantly less than they invest. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds.