(News Bulletin 247) – Specialist in small and mid-caps, Sarah Thirion, equity strategist at TP ICAP Midcap, discusses the recent rebound in this segment of the stock market which has been completely neglected in recent years. She also describes the factors that could confirm this return to grace of this universe of values.

Will 2024 mark the return to favor of small and mid-caps on the Paris Stock Exchange? Some warning signs tend to fuel the hope of better days for this universe.

Since the start of the year, the CAC Mid & Small index has increased by 8.3% while its big brother, the CAC 40, has gained 6.10%. And if we narrow the lens to a shorter time frame, in this case three months, the performance is even more notable. The first index cited jumped by 6.6% when the flagship Parisian index only gained a meager 0.85%.

Despite this recent rebound, small and mid-caps constitute prime targets given their “attractive” valuation. “The most liquid stocks in this rating universe suffer a 20% discount in terms of profit ratio, compared to their historical average over 10 years,” said Olivier de Royère, equity manager at Montpensier Finance, last April on the air of News Bulletin 247.

Small and mid caps have therefore not said their last word. For News Bulletin 247, Sarah Thirion, equity strategist at TP ICAP Midcap, gives us her analysis on the reasons explaining the underperformance of this universe of the Paris Stock Exchange. It also shows us the factors that could fuel this return to grace of this universe of values ​​which has been completely neglected in recent years.

News Bulletin 247: Despite their recent rebound, small and mid-caps still remain undervalued. What is the reason for this disenchantment with this sector of the rating in France but also at the European level?

Sarah Thirion: Indeed, the MSCI EMU Small index fund has regained more than 25% since the end of October 2023 and nearly 7.5% since the start of 2024 but still presents a 12-month price-to-earnings ratio of less than 14 times, reflecting a discount of more than 27% compared to the 5-year history and 38% compared to the 10-year history.

Small and mid caps have suffered in recent years from their domestic bias in the macroeconomic environment in the euro zone (70% of their activity), from the compression of multiples linked to the rise in interest rates, from fear a liquidity crisis, the under-representation of certain themes such as luxury and semiconductors for growth, health for the defensive bias or, even energy, which were at the heart of the 2022 themes and 2023. They have also been deserted beyond the obvious withdrawals from the asset class, by the major rotations around rates and inflation which drive the indices.

The persistence of a high discount proves that they have not really benefited either from the absence of recession in the euro zone in 2024, nor from the slightest deterioration in credit conditions in the euro zone, nor from the prospect of a fall in key rates, nor the stabilization of the euro.

Is the return of liquidity an essential condition for this rebound? What other factors can support this?

Liquidity is obviously a major investment criterion for institutional investors. But the absence of recession in Europe and the ECB’s easing of monetary policy should support the asset class which has poorly valued early growth stories whose earnings growth should improve and pure players , leaders, and many family businesses whose interests are aligned with ours.

Which stocks and/or sectors will be best able to benefit from the rebound in this compartment?

The “return of affection” is gradually being expressed in mid-caps before probably trickling down to small ones. The bonus will go to leaders and unique values ​​initially. In this category, we could cite as examples the Seb group, ID Logistics, Pierre & Vacances, GL Events…

If the companies align good fundamentals and a possible event driven (potential acquisition, potential special situation, potential new development improving the growth and profitability profile) we then find an “addition of soul” and echo now among the institutional.

It will take good news on the economic cycle of the euro zone for the compartment to regain significant height as a whole since, in essence, mid and small caps are significantly more cyclical (55% of MSCI EMU Mid) than large caps (40% in MSCI Europe).

On May 22 and 23, you organized your 10th annual conference in partnership with Euronext. Among the 120 companies present there, many Italian companies made the trip… On a European scale, Italy therefore constitutes a source of gems… For what reason?

Italy indeed has an attractive network of SMEs with strong particularities and attractive valuation levels. Italian small caps are also little covered by global brokers and often less known to international investors. Based on relative valuation and net earnings per share outlook, Italian small caps are in good shape.

In this conference, what was the tone of the leaders present? What lessons can we learn from this?

Fortunes are diverse. For some, visibility is still lacking. Geopolitics, elections, China’s anemia, artificial intelligence are all factors of caution as well as base effects, which moderate sentiment for those who have benefited from the post-covid recovery.

Conversely, sectors that suffered in the aftermath of the financial crisis indicate that the low point in terms of activity has passed. At this point, cite Figeac Aero, Groupe Seb, ID Logistics, Eurobio Scientific, GL Events, Eviso, Omer Decugis, Infotel for example. Let’s go where visibility improves.

The Parisian stock market is becoming visibly thinner with the numerous buyout operations targeting small and mid-caps, while on the other hand, IPOs of this type of company have been blocked since the Stif operation in December 2023… What what are your thoughts on this phenomenon?

The attrition of the rating has been evident since 2021. The discount has not escaped long-term investors. Indeed, founders, industrialists and private equity funds who have an investment horizon different from ours have multiplied the offers. In France alone, according to the AMF, 43 public offers were materialized in 2021, 32 in 2022 and 23 in 2023. The median premium offered to share holders was 30.5% in 2022 and almost 43% in 2023 .

The financing need of small and medium-sized companies remains intact but the volatility of the financial markets has not helped to create major opportunities in terms of IPOs in 2023. On the other hand, this same volatility will have finished possible stock market projects for certain companies for fear of seeing their valuation uncorrelated with their economic reality.

The normalization of the monetary cycle will perhaps allow new IPOs in the coming months and note that in this configuration, the subject also comes up first with mid-caps. Planisware, Puig illustrated it, then that of Exosens on Friday and that of the Italian group Golden Goose to come.

Has TP ICAP Midcap recently helped companies get listed? If so why?

TP ICAP Midcap is the group’s investment bank which addresses the financing needs of European small and mid caps in equities and debt. Midcap has completed more than 25 IPOs since its creation 10 years ago. The corporate team as well as management will have been responsible for more than 100 IPOs in their careers.

The year 2023 will have been a small year with only 4 IPOs. We hope that the market allows us to envisage great operations in the second half of 2024 or in 2025.