In 2023, the Ftse Mib rose by 28%, approximately 30% more than mid-small caps (e.g., the Star index dropped by 3% since the beginning of the year).
Randone states “The technology sector should regain lost ground in 2023. We also see opportunities in some retail sector companies.”
After significant underperformance in the past year, Eurozone small caps are gearing up for an upward surge. Oxford Economics analysis indicates that Eurozone inflation will decrease much faster than expected by the ECB in 2024, paving the way for an easing cycle starting in April, reaching a deposit rate of 2.50% by year-end. This shift in monetary policy strategy could benefit Europe’s “small” universe, inclined towards interest-sensitive sectors like industrial and discretionary consumer goods and significantly underweight in the financial sector.
Daniel Grosvenor, Director of Equity Strategy at Oxford Economics, explains, “Indeed, Eurozone small caps have outperformed the rest of the market after the end of the last three tightening cycles. Smaller companies are generally more reliant on short-term bank loans than their large-cap counterparts and have felt the tightening of financing conditions. While we believe restrictive conditions will continue to weigh on economic growth in the coming quarters, the latest ECB survey on bank lending shows that the pace of tightening has peaked, and banks anticipate further moderation in the fourth quarter.”
Despite recent data indicating stagnant growth in the Eurozone, Oxford Economics predicts a recovery in 2024 as an increase in real incomes boosts consumer spending. Grosvenor notes, “Small caps are likely to perform relatively well in this context, as they are more focused on the domestic market than large caps. Our macro forecasts indicate a robust recovery in their earnings in the second half of next year.”
And in Italy? In 2023, the Ftse Mib rose by 28%, about 30% more than mid-small caps (e.g., the Star index dropped by 3% since the beginning of the year). Andrea Randone, Head of Mid Small Cap Research at Intermonte, considers this “an extremely significant deviation.” Looking ahead to 2024, he believes this trend could reverse, with mid-small caps showing a favorable dynamic. Randone explains, “We think the same drivers that led to underperformance in 2023 could reverse course and drive the expected recovery in 2024.” First and foremost, he mentions interest rates, which are expected to remain stable or even decline, bringing growth stocks back into focus over value stocks, as partially seen at the end of 2023. Randone emphasizes the importance of this factor for mid-small caps, as this asset class is akin to growth stocks.
“In addition,” Randone continues, “after a very negative 2023, Individual Savings Plans (Pir) should hopefully see positive inflows, thanks to recent legislative measures allowing individuals to hold more than one Pir.” He notes that Pir represents about 10% of the floating shares of Italian mid-small caps.
Regarding sectors that could drive the recovery, Randone believes the technology sector should recover lost ground in 2023. “Valuations are attractive (P/E well below 20x) in light of revenue growth expected to remain in double digits.” Randone states that Italian companies recognize the opportunities offered by embracing the digital revolution promptly to remain competitive, and this should support the economic performance of technology companies even in the presence of a not particularly bright macro outlook. He concludes, “Among other sectors, we recommend a more selective approach, but we see opportunities in some retail sector companies, leaders in their segment, whose stocks have corrected significantly in 2023, creating valuation opportunities. As a third group, we like to point out companies with good cash generation and a high dividends, whether they belong to the utilities sector or other sectors like media.”
