- Mid-caps benefit from ECB cuts and EU fiscal spending, with limited exposure to global trade risks
- Europe’s market gains have been concentrated in sectors where mid-cap names are key beneficiaries
- Europe's mid-cap firms are global leaders in high-value niches that often trade at a discount
- EIB is scaling up financing for defense-related SMEs
- Strategic and private equity interest drives consolidation and rerating potential
Resilience through domestic exposure. Given persistent global trade tensions and a weakening external outlook, we recommend a selective approach favouring domestically focused companies that are less exposed to international volatility. European equities, in particular, offer a defensive profile due to their higher concentration of non-tech and non-cyclical businesses. These companies are benefitting from aggressive European Central Bank (ECB) rate cuts, domestic infrastructure initiatives, and renewed fiscal spending, helping to decouple their earnings prospects from global macro headwinds.
Selective outperformance driven by infrastructure beneficiaries. Europe’s equity rally has been narrow in scope, with gains largely concentrated in sectors aligned with domestic policy support—namely defense, financials, utilities, telecoms, industrials, and construction. These industries are benefitting directly from increased government spending, particularly Germany’s stepped-up defense and infrastructure commitments. In contrast, more globally sensitive cyclicals—such as autos, luxury, basic resources, and chemicals—have underperformed. Within this context, Europe’s mid-cap segment, especially those leveraged to domestic capex cycles, presents compelling opportunities for stock selection.
Deep industrial expertise as a competitive edge. Europe’s small- and mid-cap industrials remain a structural bright spot, underpinned by the continent’s long-standing engineering tradition and highly specialised manufacturing base. Many of these firms—particularly in Germany’s Mittelstand, northern Italy, and the Nordics—are global niche leaders in automation, robotics, precision tooling, and components essential to energy transition and digital infrastructure. Often family-owned and founder-led, these companies offer flexible operating models, strong export capabilities, and consistent margins. Yet, they are frequently under-researched and undervalued relative to larger peers. As supply chains regionalise and demand for electrification and efficiency grows, these industrial mid-caps are poised to benefit disproportionately from structural tailwinds.
Capital support unlocking growth potential. Access to financing remains a key constraint for smaller defense-linked firms, despite surging valuations in the large-cap space. To address this, the European Investment Bank (EIB) has expanded its defense support facility to EUR3bn and partnered with Deutsche Bank to funnel capital to the sector’s smaller players. A EUR500mn loan from the EIB will enable Deutsche Bank to extend credit to SMEs across the European Union (EU) defense and security value chain—unlocking much-needed investment for innovation, scale, and production capacity.
M&A as a structural and tactical theme. M&A activity remains a central theme in the European mid-cap industrial space. These firms—often niche leaders with proprietary technologies and deep customer ties—are attractive targets for both strategic acquirers and private equity. Germany’s Mittelstand has drawn particular interest from US and Asian buyers seeking access to advanced manufacturing capabilities. At the same time, larger European industrials are reshaping portfolios by divesting non-core assets and reinvesting in high-growth areas like automation and electrification. Private equity firms, drawn by strong cash flows and global scalability, remain active in fragmented verticals such as machinery, sensors, and engineering services. M&A serves both as a mechanism for value realisation and a catalyst for rerating across the industrial mid-cap universe.
Figure 1: Defense sector outperformed the most, followed by utilities and financials
Source: LSEG, DBS
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