Chart of the Week
Companies with small market capitalisations have a track record of outperforming larger caps during central bank rate-cutting cycles. The effect comes with a lag: following the initial ECB rate cuts in 2001, 2008 and 2011, it took over six months for small caps to begin significantly outpacing large caps in Europe.
On 6 June 2024, the ECB began its latest rate-cutting cycle. While the effects of declining policy rates have not yet passed through to small caps, an upward trend could emerge in 2025 if history repeats itself.
OUR ANALYSIS
In terms of corporate fundamentals, small-cap companies often face tighter credit conditions and have access to fewer financing sources than larger-cap companies. Small caps are more reliant on floating-rate debt, meaning that high interest rates can significantly increase their financing cost and that the current backdrop of falling interest rates should work in their favour.
In terms of stock market performance, small caps are typically more sensitive to macroeconomic change than larger-cap stocks. Lower interest rates should revive eurozone growth and boost business confidence for the year ahead. We also believe that a rise in the purchasing managers’ index, especially manufacturing, would attract inflows to small and mid-cap funds and help to lift performance in the segment.
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Written on 31 January 2025. This is not an investment advice. Opinions subject to change.
See also: https://latribune.lazardfreresgestion.fr/en/united-states-is-it-possible-to-reduce-federal-spending/
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