Small & Mid Cap : trends and opportunities

Market Analysis                                     11.21.2023

Each month, LBP AM deciphers market news in video. This November, Nelly Davies, Portfolio Manager, Tocqueville Finance, shares her views on the opportunities offered by the "Small & Mid Cap" asset class in our "Vu(es) sur les marchés" feature. 

Understandably small & mid-caps have fallen out of favor with investors. On one hand, the post-covid years essentially brought macro-economic worries - fears of recession, rising interest rates, geopolitical tensions - unfavorable to small caps, which are more domestic and cyclical than large caps. On the other, recurrent outflows from small-cap funds over the past 3 years have accentuated the trend. But small & mid-caps have been underperforming for an abnormally long time and scale compared with large caps. This, in our view, calls for a renewed focus on this historically value-creating asset class.

“A particularly attractive entry point” 

It is indeed worth asking whether small caps shouldn't be looked into in the coming quarters. While we don't know the timing of the recovery, current levels offer, in our view, a particularly attractive entry point given the disappearance of the valuation premium, a historic discount to large caps, and the strongest relative underperformance in 20 years, greater than during the sub-prime crisis in 2008. The question is: what could be the catalysts? 

The main catalyst, in our view, will be an inflection in interest rates, or at the very least their stabilization at current levels. Next, an improvement in manufacturing production indicators, to which small caps are highly correlated, should accompany their recovery. In addition, overly low valuations are beginning to attract other players, such as private equity firms, manufacturers and families who are carrying out buyouts, mergers or delistings. Examples include Téléperformance's takeover bid for Majorel and Sopra's takeover bid for Ordina this year. 

On a more structural level, we believe that the Small Cap segment offers major advantages. In fact, small caps offer superior growth profiles to large caps: niche companies with more flexible and responsive structures to adapt to market conditions; innovative companies that can disrupt certain market segments; and committed managers and shareholders. 

Tocqueville Finance's expertise   

Tocqueville Finance has specialized in small and mid-cap management for over 30 years. Proximity and knowledge of companies are deeply rooted in its DNA. 
The LBP AM subsidiary offers exposure across the entire spectrum of the asset class, from micro to mid-caps. Its approach is based on conviction management, fundamental and extra-financial analysis of companies, and long-term support. Valuation plays an important role in its investment decisions. 

Its multi-style, multi-theme philosophy ensures that portfolios are well diversified, enabling Tocqueville Finance to weather different market phases without major jolts in performance. 

So to conclude, current levels seem particularly attractive, and argue in favor of a gradual return to the asset class, given the present uncertainties on the equity markets. 

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