Neglected and unnoticed: these stocks are now deemed essential for investors to consider
A fresh take on undervalued European small-caps:
Investors are keeping a keen eye on Europe, but economic growth is expected to lag behind the US this year. Despite cautious optimism for the future, short-term growth is being hindered by high costs, excessive bureaucracy, and a lack of planning certainty. However, one sector seems to be bucking the trend. Experts believe investors may need to act swiftly to reap profits.
Unveiling the hidden gems?
Experts at Deka Bank have spotted an opportunity in European small-caps. In the past, the earnings growth of small-caps was similar to that of large corporations, and in some cases, even exceeded it. But inflation and a weakening economic environment have caused a rift between large- and small-caps.
There seems to be a catch-up potential, as small-caps tend to perform better than their larger counterparts during economic upswings. "European small-caps represent a positive risk-reward ratio in the next two years. We recommend overweighting them in portfolios," says Joachim Schallmayer, Head of Capital Markets and Strategy at Deka Bank.
Investment opportunities in European small-caps
The improving performance of small-caps is evident in a comparison of the STOXX Europe Mid 200 and STOXX Europe Small 200 indices with the STOXX Europe Large index. Small-caps have closed the gap with large-caps in recent months, thanks to interest rate cuts, but there's still plenty of catch-up potential. Interested investors may consider investing in an ETF tracking the "small" STOXX Europe indices.
Further insights:- Small-cap stocks, including those in Europe, generally have higher growth potential than large-caps, which can lead to outsized returns during periods of recovery or expansion.- Many European small caps remain attractively valued, partly due to less analyst coverage and investor attention, resulting in mispricings and opportunities for value investors.- European small-caps, such as banks, are benefiting from an improving regional economic outlook outside the US, a weaker dollar, and less exposure to tariff risks, which supports both growth and valuation recovery.- The European ETF market is experiencing robust growth, with investors looking for diversification and growth potential not always found in larger, more established companies. Thematic ETFs, including those focused on defense and security, have gained traction, but small-cap ETFs still provide broad exposure to fast-growing companies and emerging market leaders.- Small-cap stocks and ETFs are generally more volatile than large-caps and may be less liquid, potentially making it harder to buy or sell shares quickly at desired prices. Investors should be mindful of these risks, as well as the sensitivity to economic downturns.
Investing in European small-caps, as suggested by experts at Deka Bank, may present lucrative opportunities, given their catch-up potential compared to large corporations. During economic upswings, small-caps tend to outperform their larger counterparts, making them an intriguing choice for investors. As a result, considering an investment in an ETF tracking the "small" STOXX Europe indices might be a wise decision, especially as these small-caps could benefit from an improving regional economic outlook, a weaker dollar, and less exposure to tariff risks.
