In this market phase marked by the start of rate cuts and parallel increases in stock and bond prices, there is one piece of the puzzle that does not quite fit, namely small and mid-cap companies. Basic theory tells us that these types of companies, which have been penalized in recent years by abnormally high interest rates that have penalized their large balance sheets, should concentrate investor purchases at a time when the market clearly anticipates a withdrawal of central banks. it has already started.
In this sense, the logic would have been that, as they cooked With expectations of rate cuts growing, these companies have also begun to close the long-standing gap with so-called large caps.
Without going any further, when we talk about small capitals Globally, we tend to think of the North American Russell 2000. This index has seen an increase of just over 9% so far this year. However, this rebound is less than half of what the S&P 500 achieved in the same period. It’s not a short-term thing. If we calculate it over the last five years, the difference is the same. The benchmark index appreciated by 93% compared to 45% for the Russell.
At the European level, the Stoxx 200 Large Caps increases by 10.5% in 2024, 4 points more than its counterpart which includes the 200 small caps and that of the middle 200, which increases by a little more than 6% in this course. Overall, on a global level, the MSCI also clearly beats the subindex of small capitals. From 17% to 9%, which confirms that this trend is the norm this year on the markets.
“It is common that when a stock market recovery occurs, it begins with the largest listed companies. This is when the search for new opportunities with greater room for recovery results in advances for small and medium-sized companies , gradually closing the valuation gap created in the first phase”, explains Julián Pascual, president and equity manager of Buy & Hold. “We remain very positive about this market segment, while being selective about which titles can realize their potential,” adds Pascual.
They quote at a reduced price
The difference in behavior of small companies compared to large companies has led the former to now negotiate at a discount compared to the latter. In the case of MSCI indices, the discount is only 5% on the basis of the PER (times the profit reflected in the share price). In Europe they are purchased practically online because they are growing and less mature companies.
“Once we have seen a return to normal in terms of the debt yield curve, we now hope that normality will also return to the valuations of variable income assets since the small and mid caps continue to evolve at historic lows compared to that of large capitalizations”, underlines La Financière de l’Echiquier.
“Historically, cyclical stocks have performed worse than defensive stocks in the 12 months following a first rate cut, whether or not it was a recession cycle,” notes Bank of America. “However, between large and small capitalized companies the story is mixed, although the large have beaten the small when a recession has been avoided as on this occasion,” they conclude.
Within the Spanish market, these imbalances also occurred in favor of blue tokensand even more so in a year in which the banking sector performed particularly well and large companies like Telefónica or Inditex itself joined their ascent. Thus, while the ibex has gained more than 18% since the start of the year, the index which includes small caps increases by less than 6% in this time. However, here, after five years, the profitability of both is the same, 30%.
For the Buy & Hold expert, “there are good options on the Spanish stock market and we remain firmly convinced of the medium-term evolution of the shares of companies such as Catalana Occidente, CIE Automotive and Vidrala”.
For investors, another way to follow the trend is to go through thematic funds, such as Magallanes Microcaps Europe, the third most bullish 3-year fund in the European market.
