Small but Mighty: Why We Like International Small Caps

Paul Ryndak, CFA and Kyle Ruge, CFA

We believe:

• International small caps are especially well-positioned as the market environment becomes more attractive for international equities overall.
• Compared to large-cap multinationals, international small caps may be less vulnerable to tariffs and geopolitics.
• Drawing on our team’s 20+ years of international small-cap experience, Calamos International Small Cap Growth Fund (CGSIX) seeks out growth opportunities across international markets. Current areas of emphasis include companies harnessing regional growth dynamics in industrials, materials, IT, defense, and banking.

A Big Picture Look at International Small-Cap Opportunity

We see many tailwinds supporting international small caps, including:

• Outsized growth potential. Small caps have tended to perform well in strong markets. International markets are gathering steam, and we believe geopolitical, fiscal and monetary policy tailwinds will contribute to sustained strength in non-US markets. (For more, see our post “US Policy Shifts Awaken the Sleeping Giants” and our whitepaper, “Currents of Opportunity.”)
• Valuation support. International small caps are attractively valued versus US small caps. The P/E multiple for international small caps is now back to a two-standard-deviation discount to the aggregate US small-cap P/E multiple.

Attractive Valuations in International Small-Cap Stocks

Past performance is no guarantee of future results. Source: Bloomberg. The lower the value, the wider the discount of forward P/Es of international small-cap stocks compared to US small-cap stocks. Data as May 15, 2025.

• Exposure to local economic drivers. Many small-cap companies are especially well-positioned to capitalize on country- and region-specific rebounds because smaller companies often have more exposure to local economic drivers than their larger global peers. They are also often less vulnerable to global tariffs.

The Opportunity of Local Growth Drivers

As macro conditions and regional tailwinds evolve, selectivity and active management are key to unlocking international small-cap opportunity. For example, we believe Europe is one of the more attractive hunting grounds for growth right now. Our positioning in European companies provides a good case study of the advantages of smaller companies over larger ones and exemplifies how we harness regional-specific tailwinds.

As Europe’s economy continues to show signs of recovery, the region’s small- and mid-cap companies are especially well-positioned to benefit. The chart below illustrates the substantially higher percentage of revenues that Europe’s small-cap and mid-cap companies derive from the local European economy.

Revenue exposure to Europe by Size (FY 2023, Stoxx)

Past performance is no guarantee of future results. Source: Kepler Cheuvreux, “Best Ideas, Europe, Small & Mid Caps, SMIDs: The moment of truth,” April 4, 2025, using Datastream, Kepler Cheuvreux. Indexes are unmanaged, do not include fees or expenses and are not available for direct investment.

Infrastructure and innovation. While the US is paring fiscal spending, Europe is loosening the purse strings with the goal of enhancing economic productivity. Infrastructure spending is one area of the economy where fiscal impetus has increased; the opportunity set includes various industrials and materials companies, like beneficiaries of increased rail spending and overall construction activity. IT-related investments are another area where public entities and private businesses are increasing spending, creating opportunities for companies across a wide range of IT industries.

Banks. Many small-cap European banks are beneficiaries of an improving outlook outside the US and a weaker dollar and are also less exposed to tariff risk. We’re finding attractively valued, fundamentally strong, and innovative companies that we believe are poised to take market share from larger competitors. (For more, see our post, “European Banks: Hard Work Pays Off.”) An improved rate environment and increased return of capital have helped European banks outperform broader European markets, and in the small-cap space, we believe we can get more bang for our buck in terms of exposure to the countries that offer the most favorable growth prospects. Many of these banks are positioned to benefit from other localized growth drivers, such as increased European defense and infrastructure spending.

Defense. A changing landscape is creating new investment ideas supported by fundamentals and valuations. As the US tightens its defense budget amid its policy changes toward Ukraine, we expect Europe’s NATO members will increase defense spending to 3-5% of their respective GDPs. (See our recent post: “In Defense of Higher Spending: Geopolitics Creates Secular Opportunities.”)

Germany is leading the way with aggressive spending ambitions, but smaller countries are also stepping up; for example, Estonia and Latvia have announced defense spending targets of 5% of GDP. Smaller companies tend to be more exposed to local spending in smaller economies, which has created many tailwinds for positions in the fund.

Conclusion

Given that international small caps are not as well covered in the investment community, proprietary and comprehensive research is especially important for understanding the country- and regional-specific backdrops and identifying the companies positioned to benefit most from inflection points and disruption. Drawing on research processes tested over multiple market cycles and experience with international small-caps that dates back more than 20 years, we believe Calamos International Small Cap Growth Fund can provide the advantages that investors need to harness the outsized long-term opportunities we see.