European espresso: Is it time for a catch-up trade in European mid-caps?
As part of our Espresso series, providing an expert blend of views on European equities, Portfolio Manager Marc Schartz considers the market dynamics favouring the European mid-cap space.
4 minute watch
Key takeaways:
- Following a period of large-cap outperformance in Europe, the start of 2024 has seen some tentative signs of a fightback in Europe’s mid-cap space.
- As the market becomes more constructive on economic growth and the likelihood of future interest rate cuts, this should increasingly favour the mid-cap space.
- European mid-caps can give investors access to strong secular growth trends, currently at a price discount. There is also the potential for higher takeover activity, traditionally a strong driver of performance for mid-caps.
Today’s video is about European mid-caps, where I think there is a really compelling investment opportunity shaping up. European mid-caps have been a fantastic asset class over the long term, but this has not been the case over the last two to three years. Mid-caps have actually underperformed large-caps by more than 30 per cent over that [three-year] period[1].
That all culminated at the beginning of this year in a very narrow market, where a handful of large-cap stocks accounted for the entirety of the market’s performance. Now since mid-March we have seen signs of stabilisation and actually mid-caps have started to claw back a tiny bit of the underperformance they have accumulated.
A key element in this tentative fightback relates to valuation levels. They had become stressed to the extremes. After poor performance, mid-caps have de-rated, which has resulted in valuation discounts which we have not seen for decades.
Clearly the macro also has a role to play here. More confidence around sustained economic growth and an end to monetary tightening would be beneficial to mid-caps. Everyone has a view on the macro, but we also know that most people get it wrong most of the time, so that’s not a call we want to make here. Getting the timing exactly right is a very tricky game and I think it misses the bigger picture. The bigger picture for me is that the setup for mid-caps is currently more attractive than ever.
What has never changed is that mid-caps offer access to secular growth in less overhyped, less crowded conduits. So we talk about stocks that often fly under the radar of many investors. Companies that operate as an enabler for other companies which are more often associated with mega trends, such as electrification, data centres, or weight loss drugs.
There are other supportive factors. M&A (mergers and acquisitions) has been relatively subdued in recent years, but we see signs of pickup. And M&A has traditionally been a performance driver of the small and mid-cap space. And last but not least – investor flows. Challenging performance made many investors run for the hills. When the tide turns, these investors are likely to re-engage, which could offer some technical support, and which should help to address some of the anomalies we are currently seeing.
[1] Source: Refinitiv DataStream, Janus Henderson Investors, in euros, three years to 31 March 2024, Euro Stoxx Mid Index with Euro Stoxx 50 Index. Past performance does not predict future returns.
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De-rating/de-rated: The downward adjustment of a company’s financial ratios, such as the price-to-earnings (P/E) ratio, in response to business or market uncertainty. Or, in the case of a bond, lowering the credit rating.
Discount: Refers to a situation when an asset (eg. stock) is trading for lower than its fundamental or intrinsic value, on an absolute or relative basis.
Large-caps: Well-established companies with a valuation (market capitalisation) above a certain size, eg. US$10 billion in the US. It can also be used as a relative term. Large-cap indices, such as the UK’s FTSE 100 or the S&P 500 in the US, track the performance of the largest publicly traded companies, rather than all stocks above a certain size.
Mid-caps: Companies with a valuation (market capitalisation) within a certain scale, eg. US$2-10 billion in the US, although these measures are generally an estimate. Mid-cap indices, such as the S&P MidCap 400 in the US, track the performance of these mid-sized publicly traded companies. Mid-cap stocks are generally perceived to offer better growth potential than their larger peers, but with some additional risk.
Monetary policy: Central bank policies, aimed at influencing the level of inflation and growth in an economy. Monetary policy tools include setting interest rates and controlling the supply of money. Monetary tightening refers to central bank activity aimed at curbing inflation and slowing down growth in the economy by raising interest rates and reducing the supply of money.
Secular growth: A significant or enduring change within an industry or sector that drives a period of sustained or persistent growth.
Small-caps: Companies with a valuation (market capitalisation) within a certain scale, eg. US$300 million to US$2 billion in the US, although these measures are generally an estimate. Small-cap stocks tend to offer the potential for faster growth than their larger peers, but with greater volatility.
JHI
Please note: Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
Queste sono le opinioni dell'autore al momento della pubblicazione e possono differire da quelle di altri individui/team di Janus Henderson Investors. I riferimenti a singoli titoli non costituiscono una raccomandazione all'acquisto, alla vendita o alla detenzione di un titolo, di una strategia d'investimento o di un settore di mercato e non devono essere considerati redditizi. Janus Henderson Investors, le sue affiliate o i suoi dipendenti possono avere un’esposizione nei titoli citati.
Le performance passate non sono indicative dei rendimenti futuri. Tutti i dati dei rendimenti includono sia il reddito che le plusvalenze o le eventuali perdite ma sono al lordo dei costi delle commissioni dovuti al momento dell'emissione.
Le informazioni contenute in questo articolo non devono essere intese come una guida all'investimento.
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Important information
Please read the following important information regarding funds related to this article.
- Le Azioni/Quote possono perdere valore rapidamente e normalmente implicano rischi più elevati rispetto alle obbligazioni o agli strumenti del mercato monetario. Di conseguenza il valore del proprio investimento potrebbe diminuire.
- Le azioni di società a piccola e media capitalizzazione possono presentare una maggiore volatilità rispetto a quelle di società più ampie e talvolta può essere difficile valutare o vendere tali azioni al momento e al prezzo desiderati, il che aumenta il rischio di perdite.
- Un Fondo che presenta un’esposizione elevata a un determinato paese o regione geografica comporta un livello maggiore di rischio rispetto a un Fondo più diversificato.
- Il Fondo potrebbe usare derivati al fine di ridurre il rischio o gestire il portafoglio in modo più efficiente. Ciò, tuttavia, comporta rischi aggiuntivi, in particolare il rischio che la controparte del derivato non adempia ai suoi obblighi contrattuali.
- Qualora il Fondo detenga attività in valute diverse da quella di base del Fondo o l'investitore detenga azioni o quote in un'altra valuta (a meno che non siano "coperte"), il valore dell'investimento potrebbe subire le oscillazioni del tasso di cambio.
- Se il Fondo, o una sua classe di azioni con copertura, intende attenuare le fluttuazioni del tasso di cambio tra una valuta e la valuta di base, la stessa strategia di copertura potrebbe generare un effetto positivo o negativo sul valore del Fondo, a causa delle differenze di tasso d’interesse a breve termine tra le due valute.
- I titoli del Fondo potrebbero diventare difficili da valutare o da vendere al prezzo e con le tempistiche desiderati, specie in condizioni di mercato estreme con il prezzo delle attività in calo, aumentando il rischio di perdite sull'investimento.
- Il Fondo potrebbe perdere denaro se una controparte con la quale il Fondo effettua scambi non fosse più intenzionata ad adempiere ai propri obblighi, o a causa di un errore o di un ritardo nei processi operativi o di una negligenza di un fornitore terzo.
Specific risks
4 minute watch
Key takeaways:
- Following a period of large-cap outperformance in Europe, the start of 2024 has seen some tentative signs of a fightback in Europe’s mid-cap space.
- As the market becomes more constructive on economic growth and the likelihood of future interest rate cuts, this should increasingly favour the mid-cap space.
- European mid-caps can give investors access to strong secular growth trends, currently at a price discount. There is also the potential for higher takeover activity, traditionally a strong driver of performance for mid-caps.