1. Newsroom
  2. The potential of European small and mid-caps
Menu
UBP in the press 13.12.2016

The potential of European small and mid-caps

The potential of European small and mid-caps

L'AGEFI - In the search for opportunities in today's market environment it is clear that small and mid-caps are currently offering great value.


It is not just about a short trading window either - European "smid caps" demonstrate long-term appeal, due both to the segment's fundamentals and the profile of its constituent companies. Because of their smaller size, these companies start from a much lower base and can generally grow more quickly than their large-cap peers. In addition, they typically operate in fast-growing or attractive niche segments of the market.

There are roughly 1,500 European small and mid-caps, i.e. companies with market capitalisations of between €200 million and €5 billion. Analysts and asset managers pay relatively little attention to these smid caps, giving those specialising in this segment something of a competitive advantage. With time and application, it is perfectly possible to uncover gems that the broader market simply overlooks.

Although smid caps obviously vary widely in terms of their profiles, financial strength and business models, the segment seems to offer more scope for generating value. Much of this is down to the fact that the smid-cap universe contains a lot of companies operating in niche markets. Many have good pricing power because of their industrial expertise, exclusive products or innovations. Such characteristics can really help to mark out a sure-fire path to earnings growth. That is especially the case in the manufacturing, technology services and healthcare sectors in markets like Sweden and Germany, which have a rich fabric of small and medium-sized companies.

Looking to the future, European smid caps are set to show strong earnings momentum for the rest of 2016 and into 2017. Overall, they should offer more vigorous growth than large caps, whose earnings remain subdued by ongoing regulatory headwinds in the banks and insurance sectors. In addition, M&A deals, major demographic trends and shifts taking place within individual industries provide attractive themes across the smid cap sector.

However, it is important for investors to take steps to avoid certain pitfalls. Stock selection remains crucial, more so than in other parts of the equity market because liquidity and volatility can be more problematic than elsewhere. By taking a stock-by-stock approach, an investor can reduce dispersion of returns. To achieve that, an effective solution is to look at both the internal and external factors that drive a company's performance. This can start with an analysis of the quality of the company's balance sheet, its cash flows, operational structure, management, business culture and ability to limit costs. It can then lead to further consideration of the broader challenges and opportunities relating to the company's economic and sector environment.

In terms of investment selection it is not necessarily about making apparently obvious choices among   only companies with stable, predictable growth. Companies whose earnings are growing quickly after a turnaround, restructuring or change in business model should also be taken in consideration since they can often offer attractive buying opportunities. Furthermore, companies involved in M&A deals – which are especially common in a number of sectors including the business services and logistics sectors – are likely to attract attention and see their share prices rise. Looking specifically at companies in the healthcare sector, they may well benefit from major demographic trends such as population ageing. Additionally, fundamental shifts in the technology sector could prompt disruptive but beneficial change in a number of industries.

Read the original article


ANNISS_CHARLES_15.jpg

Charles Anniss
Small- and Mid-Cap Portfolio Manager, European Equities team

 

Expertise

Agility: at the heart of our discretionary management

Your goals and aspirations are unique – so is our approach to discretionary portfolio management.

Read more
Expertise

Swiss & Global Equities

Why Swiss equities now? This market offers equity investors the stability and agility they need to navigate this volatile period. 

Read more
Expertise

European Equities

European equities offer unrivalled opportunities in terms of breadth of sector and market exposure.

Read more

Most read

UBP in the press 23.11.2020

Frontier debt comes of age

Financial Investigator (20.11.2020) - Frontier debt has grown significantly over the past decade and now warrants serious consideration as a dedicated allocation in investors’ portfolios.

UBP in the press 18.12.2020

The drift towards thematic investing

Rankia Pro (12.2020) - Interview with Didier Chan-Voc-Chun, UBP’s Head of Multi-Management & Fund Research

UBP in the press 04.01.2021

The rise of UBP’s impact strategy

Funds Society (14.12.2020) - The first strategy in UBP's impact investing platform, Positive Impact Equity, has been going from strength to strength since its inception. Impact investing specialist Yvan Delaplace details the strategy’s investment process and broader sustainability trends in the sector.


Further reading

UBP in the press 18.02.2021

Why renewable energy has come of age in 2020

Environmental Finance (05.02.2021) - What changed to make renewable energy such an investment success story in 2020, UBP’s Mathieu Negre asks

UBP in the press 03.02.2021

Compelling opportunities in Japanese small-cap techs

Funds Society (28.01.2021) - An improvement in corporate governance, a stable government and a leading edge in digitalisation and robotics are making the Japanese small-cap segment a rich source of attractive opportunities for selective investors, says UBP Senior Analyst Cédric Le Berre.

UBP in the press 29.01.2021

Fixed income outlook: Positive environment for credit

Institutional Money (27.01.2021) - Despite an accelerating Covid-19 spread into year-end, risk markets concluded 2020 on a strong note as investors took confidence from the commencement of the vaccine rollout in the US and UK.