(News Bulletin 247) – With the exception of 2020, the CAC Mid & Small has significantly underperformed the CAC 40 since 2018. Small stocks are suffering from an unfavorable economic climate and an outflow movement, while the CAC 40 has benefited from the sparkling form of luxury values.

These are values ​​for which the market is supposed to represent an important relay of financing and which are nevertheless struggling: small and mid-caps.

As shown in the graph below, these titles have suffered since 2018 from the comparison with the big names in the Parisian marketplace. Thus, the CAC Mid & Small index has – with the exception of 2020 – underperformed the CAC 40 every year. This is still the case at the start of 2023, the flagship barometer of the Paris market taking over 15 .35%

since January 1 against barely 5.15% for the CAC Mid & Small. An underperformance which is partly explained by the strength of luxury on the CAC 40, a sector with very little presence in the smallest caps. But, in the long term, many other reasons exist.

“The underperformance of small and mid caps comes after years of outperformance against the CAC 40. During this period, these stocks benefited from their structurally much stronger earnings growth rates, around 15% at 20% per year. It is easier to obtain these rates when you are an SME than a large company, which is considered more like an ocean liner, certainly resistant to storms but slower to handle in periods of recovery”, explains Vincent Le Sann, deputy general manager of Portzamparc. [pour constater cette sous-performance, NDLR]”You have to go back several years

since the risks of recession appeared, in 2018″, noted Julien Fauvel, manager at Talence Gestion, at the end of April, on BFM Business.

“The turning point was June-July 2018, that’s when the market turned around, with valuations of small and medium-sized companies which were very high at the time”, adds Pascal Quiry, professor of finance at HEC and co- author of the stock market newsletter Vernimmen.

A wave of outflow

The smallest stocks are penalized by their low liquidity, itself a consequence of significant outflows that have taken place in recent years.

“Since 2018, there has first been profit taking on these stocks. And, from 2019, outflows at the level of funds specializing in small and mid-caps (there are around 200 in France) “, recalls Vincent Le Sann.

“This outflow has created a kind of vicious circle. Mid and small caps are characterized by less liquidity. When you put a package of shares on this market for sale, you don’t have many buyers in front of you, this creates a mechanical downward movement. Outflows thus lead to the fall of this small value market which itself, through poorer performance, fuels outflows a little more. It is a negative spiral from which we are struggling to emerge”, details the specialist.

The other big blow is due to the less favorable economic context. “As soon as the economic situation deteriorates, the market returns to large stocks. The Covid, inflation, all these elements weigh down small and mid-caps because these companies suffer, on average, more than large ones when the economy loses momentum. speed”, emphasizes Pascal Quiry.

“There has also been a perception of greater risk. The last few years have been marked by the health crisis, the conflict in Ukraine and the global economic slowdown. All these macroeconomic events in essence penalize mid and small caps, because investors favor in this context the largest groups. The idea is that the liner will always survive the storm where the small engine risks being swept away by a wave”, abounds Vincent Le Sann.

A movement that is likely to last [introductions en Bourse, NDLR]The wave of IPOs on the Paris stock exchange which has occurred since 2018, with a large part of small companies, could also have played a role. “We can note that over the last three IPOs

“have occurred and “many companies have taken advantage of a window to express a high valuation”, notes Julien Fauvel. “By definition we have a return to normal in a phase of rate hikes”, adds the manager.

“If we look at the IPOs that have taken place in recent years, 5/6ths of companies are trading below their IPO prices, which tends to show that they entered the stock market at too high a price. And the more you small beings, the greater the probability of experiencing a drop after the introduction”, specifies Pascal Quiry.

What is needed for the trend to reverse and for small and mid-caps to regain momentum on the stock market? “The economy needs to be better and less unstable, less unpredictable. It will probably take time, it’s not for tomorrow,” judge Pascal Quiry.

“Everything will be linked to the perception of the economic cycle and therefore of a rebound in the economy. From the moment the economic recovery is perceptible, small and mid-caps will start to outperform again and we will be able to move from a vicious circle to a virtuous circle, with a return to fundraising”, confirms Vincent Le Sann.