Germany’s big comeback? Five reasons smaller companies could lead the charge

Julia Scheufler, deputy fund manager for The European Smaller Companies Trust, recently visited Germany. Here’s what she learned – and why smaller businesses might be the ones to watch.

When we want to understand what’s really happening in an economy, headlines only tell part of the story. That’s why ESCT deputy fund manager Julia Scheufler recently spent time in Germany meeting company leaders and investors to hear their views firsthand. The mood was cautious, but there are clear signs that change is coming – especially for smaller companies.

Here are five key takeaways from her trip.

1. Headlines vs reality

Germany has been making noise about reforms and big spending plans. But the mood on the ground is still slightly cautious. Businesses and investors are waiting for those changes to filter through before confidence picks up. For investors, that gap between reality and sentiment can mean opportunity.

2. The building blocks are in place

Germany has already signed off major investment plans – from defence to infrastructure – and these projects are designed to support growth for years to come. The best part? The 2026 budget is agreed, giving businesses clarity and confidence to plan ahead. That means companies positioned for these upgrades could start to see opportunities sooner rather than later.

3. Why small caps could shine

Economic ups and downs tend to have a more immediate impact on smaller companies than on large ones. They’ve had a tough few years, but pressures are easing; inflation is down, wages are up, borrowing costs have stopped climbing. That’s good news for businesses that rely on domestic demand.

History shows that when confidence returns, small caps often bounce back faster than big companies. Right now, many are trading at attractive prices compared to large caps. For investors, that means a chance to pick up strong businesses at good value – before the recovery really kicks in.

(The European Smaller Companies Investment Trust currently has an overweight to Germany, reflecting this long-term potential.)

4. Early movers are leading

Right now, banks are ahead of the pack, and defence firms are already seeing the benefits of government reforms. But the next wave could come from companies working behind the scenes on Germany’s upgrade. Think IT specialists like Bechtle, ready to deliver Germany’s long-overdue digital refresh. Or Ströer, which stands to gain as consumer confidence improves, and advertising budgets grow. These aren’t household names, but they’re essential to modernisation – and that’s where opportunity often hides.

5. Patience could pay

Germany isn’t booming yet, but the building blocks are in place. For investors willing to wait, 2026 could mark the start of something bigger – and when Germany moves, the implications are likely to extend well beyond its borders.

Bottom line: The mood may feel cautious, but Julia’s trip suggests opportunity is brewing – especially for smaller companies.

Glossary

Glossary:

Inflation

The rate at which the prices of goods and services are rising in an economy. The consumer price index (CPI) and retail price index (RPI) are two common measures; the opposite of deflation.

Large-cap stocks

Well-established companies with a valuation (market capitalisation) at the larger end of the market scale.

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Having a larger exposure to an individual security, asset class, sector, or geographical region than a relevant benchmark, such as an index.

Small-cap stocks

Companies with a valuation (market capitalisation) at the smaller end of the market scale.

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