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Small values with big opportunities

The economy and stock market prices have been going their separate ways for some time now. While German economic growth is sluggish, shares are on a course for record highs. However, this mainly applies to large corporations. Second-tier stocks, on the other hand, are trading at steep discounts. “The hour of small and medium-sized companies is yet to come,” says Carsten Gerlinger, Managing Director and Head of Asset Management at Moventum AM. “But we’re not there yet.”

German economic output shrank by 0.3% last year, and forecasts for the current year range from a mini-increase to a further decline. We will probably have to wait until 2025 for a stronger recovery. The German share index (Dax) is quite different: It has gained almost 20 percent since October (as of February 26). “The discrepancy between share price performance and economic development in Germany is enormous,” says Gerlinger. The explanation: many German companies are benefiting from the improved economic development abroad. “Germany continues to be a strong export economy,” says Gerlinger.

The internationally positioned companies in the Dax are benefiting most from the improved economic situation in America and Asia. On average, they do not even generate a fifth of their turnover in Germany – for the smaller MDax companies, this figure is around 30 percent, and for SDax stocks it is even over 40 percent. “Many small and medium-sized companies are more focused on the domestic economy,” says Gerlinger, “they will benefit more from a turnaround in interest rates.”

However, the question is whether the turnaround in interest rates will come as expected? After all, the US economy continues to perform surprisingly well, while the inflation rate is falling only slowly. Most recently, it was still at 3.1 percent, and in December it even climbed to 3.4 percent. The minutes of the US Federal Reserve’s meeting at the end of January show that most monetary authorities see the danger of lowering interest rates too early. The European Central Bank, for its part, continues to worry about wage growth, which poses a risk of inflation.

“All of this limits the interest rate cut fantasies,” says Gerlinger. “The right time to invest in small caps has therefore not yet arrived.” He puts this time in the second half of 2024, and if you invest in small caps, it is better to do so in the USA than in Europe, where the economy will remain weaker for the time being. However, the small caps offer investors great opportunities: “Many small-cap stocks are more attractively valued than they have been for many years,” explains Gerlinger. They are now trading at a discount to large caps.

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