Berenberg Says French Turmoil Spoils Momentum for Small Caps

Julien Ponthus
·2-min read

(Bloomberg) -- The upheaval in France has spoiled the momentum that was building for Europe’s beaten-down small caps to benefit from lower interest rates and a rebound in economic growth, according to Berenberg Wealth & Asset Management.

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After trailing Europe’s benchmark since a high in 2021, small-cap stocks were on the cusp of a revival after the European Central Bank delivered its first rate cut this month, said Matthias Born, chief investment officer for equities at Berenberg, which managed about €38 billion ($41 billion) in assets at the end of 2023.

The outlook for better economic growth would’ve added further fuel to the rebound, but the rout that followed French President Emmanuel Macron’s decision to call a surprise election has jeopardized that prospect, he said.

“The French crisis is disturbing that nice set-up,” Born said. Still, small caps remain at “super attractive levels” compared to larger companies, he said.

The Stoxx Europe Small 200 Index is down about 17% from a peak in November 2021 and trades at a forward profit-ratio of 12.8 times. By contrast, the Stoxx Europe Large 200 Index has risen about 11% over the same period, with a price-to-earnings ratio of 13.9 times.

The impact of the current turmoil will probably not endure, Born said. However, inflows into the region will need to improve for small-caps to shake off their under-performance, he said.

Talking to Bloomberg in between meetings of a roadshow, Born said that while clients were receptive to the investment case for small caps, many were inclined to watch from the sideline until the outlook improves.

“That’s the feedback we have from clients because uncertainty is high for France,” he said.

Flows of capital into European equity funds have been negative for the past four weeks, whereas their US counterparts saw inflows for eight straight weeks, according to Bank of America strategists, citing EPFR data.

--With assistance from Michael Msika.

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