European stocks are back in focus due to attractive valuations and shifting investor sentiment. Hywel Franklin of Mirabaud Asset Management predicts 2026 could be a breakout year for European equities, with small caps offering better opportunities than large caps. Franklin highlights Italy, Norway, and Germany as countries with compelling small cap opportunities.

Passive investment flows have distorted European stock valuations, making larger companies more vulnerable to reversals. Franklin prefers small caps due to less passive investor influence and better valuation support. He sees economic shocks and policy errors as potential risks to a European small-cap recovery, but believes other market areas are more vulnerable.

Franklin recommends three European small cap stocks: Credito Emiliano in Italy, Norma in Germany, and AcadeMedia in Sweden. These companies represent exciting opportunities in banking, automotive, and education sectors, respectively. The focus on underappreciated, under-owned sectors underpins Franklin’s strategy for finding the best small cap investments in Europe.

Read more at Morningstar: 3 European Small Cap Stocks For 2026