'Now is the right time to focus on small and medium-sized European companies'
There is particular interest in three companies: Italy's Credito Emiliano, Ireland's Glenveagh Properties and Germany's Eckert & Ziegler
3' min read
Key points
- Inflation in the Eurozone continues to fall, so much so that the risk that seems to be looming for the coming months is that it will remain at levels that are too low in the face of slowing economic activity in 2025. What are the prospects for the European economy?
- What are the areas to focus on and what are the risks to be aware of?
- What titles do you find interesting?
3' min read
Small- to mid-capitalisation companies in Europe have untapped potential that will emerge in the coming months, especially innovative companies in particular growth niches. This is explained in detail by Hywel Franklin, head of European equities at Mirabaud Am.
Inflation in the Eurozone continues to fall, so much so that the risk that seems to be looming for the coming months is that it will stay at levels that are too low in the face of slowing economic activity in 2025. What are the prospects for the European economy?
Inflation has fallen substantially and is now below the ECB's target range. This, together with the subdued growth outlook across the continent, leads us to believe that rates will continue to fall next year. Markets are starting to anticipate cuts, but we are only in the early stages of this process. This creates an environment of opportunity, where the valuations of these companies could be particularly attractive to investors.
There is open talk of a German recession. What factors could trigger a recovery in 2025?
German economic growth has been rather weak recently but, with inflation declining, we think it highly likely that the ECB may implement further rate cuts, perhaps even faster than the markets had expected. Europe is home to a large number of small- and mid-capitalisation companies, an equity segment that is, however, often undervalued by investors.
What opportunities does this market offer instead?
Historically, in the periods following the first ECB cuts, smaller companies outperform larger capitalisation companies, and we expect this to be the case this time as well. Small caps offer many opportunities: there are many innovative companies within growth niches and others for which the worst cyclical prospects have already been priced in; therefore, we see significant upside potential in this segment. In Europe there are many dynamic, well-managed companies with good long-term prospects, but we feel they are significantly undervalued, as investors are still too focused on the US. Investors will look to Europe again when they see these companies stabilise and then increase earnings, as we believe will happen next year.
What are the forecasts for European equities, and in particular for SME stocks, in the coming months?
We witnessed the worst ever period of underperformance of European small capitalisation companies compared to their larger counterparts. However, after a period of underperformance, these companies are rebounding strongly, returning to double-digit outperformance. Given the historical decline so far, we expect a strong recovery. We see particular traction from some of the smaller companies, many of which were ignored by investors during the 'flight' of recent years to safer segments. There is therefore a real opportunity for investors to adjust their asset allocation.
