SMID: Desperately Seeking Alpha

At a time when all major equity indices (MSCI Europe and the S&P 500) are near their all-time highs and trade in the upper ranges of their valuation bands, investors are naturally turning their attention to small and mid caps, given their valuation discounts*. But the most seasoned among them know all too well that while price is a necessary starting point, catalysts are essential to close the gap.

The first of these catalysts relates to the correlation between the SMID segment and the macroeconomy of the Eurozone, as well as its proxy, the Purchasing Managers’ Index (PMI). In this regard, Germany’s momentum will be crucial. Recent weeks have been marked by a series of negative news (layoffs at Bosch, Siemens…), but the worst may now be behind us. Indeed, the budget approved in mid-September should allow spending to ramp up in the fourth quarter and in 2026, with domestic demand as the primary target through support measures for businesses and the labour market. Moreover, the current excess capacity* should, in theory, enable fiscal policy to benefit from a high multiplier.

Due to the geographical distribution of their end markets (65% in Europe and 13% in North America), companies in this segment are naturally less exposed to the uncertainties of U.S. tariff policy. The recent announcement of a bilateral agreement between the United States and the Eurozone at a 15% level should have been a clearing event for investors. Alas! True to his unpredictable temperament, the U.S. President subsequently announced new specific taxes on the pharmaceutical industry, heavy trucks, and kitchen furniture. While this tariff creativity helps swell the coffers of the U.S. Treasury, it also brings renewed uncertainty as to whether European companies concerned will be able to pass on this additional cost to their clients. In relative terms, this unstable trade environment should therefore mechanically favour small and mid-sized companies.

Monetary conditions are also working in their favour. The ECB’s rate cuts have mechanically reduced the cost of capital and encourage investment. Even though recent statements from members of the monetary institution’s governing council point toward a pause, financial conditions have continued to ease thanks to tighter corporate credit spreads and lower oil prices. The other financing channel, bank credit, shows no signs of breaking down despite the prevailing uncertainty: the latest official ECB figures show a reasonable increase in credit production****.

Finally, there is the ever-popular topic of mergers and acquisitions. In this regard, the Italian and Spanish banking sectors have made headlines over the past six months due to the fragmented nature of this industry in both countries. More broadly, after 2023 and 2024, which recorded the weakest M&A activity in Europe in a decade, the trend seems to be reversing: over a rolling twelve-month period, total announced transactions amount to USD 900 billion, a 10% increase compared with the previous period.

By nature, small and mid caps are relatively more sensitive to domestic developments (fiscal policy, monetary policy, and credit). Today’s geopolitical environment—marked by tariffs, reshoring of production capacity, and fragmentation—is inherently fertile ground for this part of the market. These arguments should be sufficient to bring investors back after several years of neglect. Indeed, in a world characterised by dispersion and de-globalisation, stock pickers should benefit from earnings dynamics specific to this segment, leading to the generation of the long-sought-after alpha…

*12-month forward price-to-earnings ratio of 12.4x (2026) for the MSCI EMU Small Cap vs. 15.3x for the MSCI EMU Large Cap
** PMI at 52,4 in October
*** Capacity utilisation below 80%
**** +2.7% YoY in September

Pierre Pincemaille, General Secretary of Investment at DNCA. This article was finalised in November 21st, 2025.

This promotional document is a simplified presentation and does not constitute a subscription offer or an investment recommendation. No part of this document may be reproduced, published or distributed without prior approval from the investment management company.

DNCA Investments is a trademark held by DNCA Finance