THE small capitals They are trying to make a comeback on the stock market and, in the last two sessions, they have gained around 1.9% in the heat of falling rates in Europe. They are trying to reverse a year 2024 which, even if it looked positive for them, has not been favorable to them for the moment. The Ibex Small Cap – which brings together the 30 least capitalized stocks – gained around 6% over the year. The Ibex 35 rises three times more, close to 18%. And the gap between the two – around 12 points in favor of the Ibex – has just reached its highest level of the entire year. But precisely this week, marked by the ECB’s third rate cut, announced this Thursday, this distance has been reduced by almost two points.
The current moment is intended to favor these companies. History shows that small-cap companies outperform large-cap companies during periods of falling rates, thereby reducing their financing costs and reactivating the economy. But until now, even monetary policy had not injected these companies with the essence scholarship they need.
Which companies are we talking about? Within the Ibex Small Cap, The largest increases this year were led by Aedas Homes, Audax Renovables and Grupo Ezentis.which climbed 45%, 41% and 40% respectively. The largest in this index are Aedas, Prosegur and Grenergy, which in all cases exceed one billion euros in capitalization. The smallest is Ezentis, who does not reach 60 years old.
Compared to current levels, the potential for the Ibex 35 is 9%, and it reaches 47% for the Small Cap.
As Jean-Pierre Mariaud, head of European small and medium-sized enterprises at Crédit Mutuel AM, explains: “The ECB has already started to ease its monetary policy and falling inflation levels are reinforcing expectations for a more accommodative monetary policy. in the future. Then, the historical correlation between the higher profitability of small capitals and the PMI index suggests the possibility of a rebound in this segment when the cycle starts to improve again. » For their part, fund managers small capitals of GVC Gaesco Jaume Puig and Pol Companys recently explained that interest rate reductions by major central banks would serve as a “great catalyst” for the promotion of smaller listed companies, as stated Europe Press. But, for the moment, this catalyst has not been activated and 2024 is set to become the fourth year in a row that the Ibex 35 beats the Ibex Small Cap.
“The macroeconomic context resulting from the Covid crisis and the reopenings which followed caused an alignment of circumstances unfavorable to the profitability of small capitalization companies in 2022 and 2023. This situation, driven by inflation and an increase in interest rates. particularly violent interest, prompted investors to move away from risky assets”completes Jean-Pierre Mariaud of Crédit Mutuel. But we are approaching a turning point: “The first half of the year once again revealed the low profitability of small capitalization companies, with an increase of 7% for the Stoxx Small Europe 200 Net Return compared to 11% for the Stoxx Large Europe. 200 Net Return. This underperformance increased in January then stagnated, suggesting a change in trend in the eyes of investors,” he adds. Compared to current levels, the potential for the Ibex 35 is 9%, and it reaches 47% for the Small Cap.
For his part, Graham McCraw, senior equity investment specialist at abrdn, explains that the manager analyzed the profitability of small, mid and large cap US securities three, six and 12 months after a rate cut, and the conclusion is that “the higher profitability is evident; “And while it’s true that this data only pertains to U.S. stocks, we believe there are enough similarities with their European counterparts to draw similar conclusions.”
McCraw points out that THE little are trading cheaply compared to their historical and large-cap counterparts. “When it comes to European stocks, smaller companies trade at attractive valuations. Euro-denominated small caps typically trade at an average premium of 26% to their larger counterparts. However, today they are significantly lower than this premium and cheaper in relative terms, trading at an 8% discount to large caps. This analyst refers to the MSCI Europe Small Cap versus MSCI Europe. Small trades with a PER of 23 times, compared to an average of 27 over the decade (still well above the Ibex 35’s PER of 11 times).
