Key takeaways
We see attractive opportunities for European Small and Midcaps (SMIDs) this year, thanks to a favourable environment:
- Compelling valuations: European SMIDs show attractive relative valuations with significant upside potential, currently trading at historic lows compared to large caps.
- Declining ECB interest rates: the decreasing inflation rate in the Euro area is enabling the European Central Bank to continue its easing path, thereby supporting the region's economy.
- Strengthening domestic consumption in the area: the anticipated increase in domestic consumption is expected to drive growth. European SMIDs, being more closely tied to the domestic economy, should be better positioned than their larger counterparts and are also less sensitive to geopolitical tensions.
European SMIDs could offer portfolio diversification potential as they behave differently from large-cap stocks throughout economic cycles. However, evolving global trade dynamics and geopolitical tensions could present some risks.
After a year of mixed performances in global equity markets, 2025 could be the year to consider European Small and Midcaps (SMIDs). Growth in the US is expected to moderate, driven by slowing domestic demand, a weaker labour market, and potential inflationary pressures if the US President Donald Trump follows through on his campaign promises.
Meanwhile, in Europe, inflation is expected to continue its downward trajectory, which should support real incomes. As a result, interest rates are set to decline further, support economic activity and offsetting some downside risks to growth. Equity market valuations, especially in European SMIDs, appear attractive and could offer significant upside potential, as these stocks are often more sensitive to positive changes in economic conditions and reduced interest rates.
External trade acted as a stabilizer for the European economy in 2024. However, as we progress through 2025, domestic consumption continues to be a key driver of growth, supported by the ECB’s interest rate cuts, with the terminal rate expected to reach 1.50% by July1 . This monetary easing is set to boost purchasing power, and the savings accumulated by consumers during the prior higher interest rate period could provide further support spending.
Potential for growth in Europe
Global policy uncertainty and ongoing geopolitical tensions pose risks for all segments, including European SMIDs, which underperformed in 2022 and 2023 due to rising inflation, rapid interest rate hikes, supply chain disruptions, and negative market sentiment that collectively hampered growth. However, these risks may be more than priced in. The gap between the forward P/E for the S&P500 and the Stoxx600 indices that Europe is particularly appealing as a value play, with an emphasis on quality deemed essential. With European SMIDs' earnings growth outpacing their large-cap counterparts since 2022, the fundamentals remain attractive, especially given their recent underperformance, which should support valuations.
2024 concluded with inflation stabilising at a more manageable level, and the ECB – after cutting rates on April 17th, marking its seventh rate reduction since June 2024 – is expected to continue easing this year.
This shift towards a more neutral monetary policy, coupled with a rebound in economic momentum, should support European SMIDs for a number of reasons:
- Smaller companies tend to be more domestically focused, which means their performance is more closely tied to the growth of the domestic economy.
- Riskier assets, such as SMIDs, are generally considered more attractive in a lower interest rate environment.
- Large-cap corporates can raise capital using equity or bonds, while SMIDs are much more reliant on bank financing, which is expensive in a high interest rate environment.
- Lower interest rates tend to kick-start corporate consolidation and M&A activity, as reduced borrowing costs make acquisitions more appealing, which can result in operational efficiencies and an increased market share, ultimately boosting valuations.
Balanced approach
SMIDs often behave differently from large-cap stocks throughout economic cycles, making them a valuable tool for enhancing portfolio diversification. These companies are typically seen as the growth engines of an economy, expanding more rapidly than their larger counterparts as they scale their businesses.
Further diversification within the European SMID category across various sectors can also help mitigate risks. For instance, domestic players such as utilities, which serves as safe havens against global turmoil, generally offer stable earnings and lower growth, while providing regular dividends, which can be particularly appealing in a low interest rate environment. The financial sector tends to perform well when the economy expands, benefiting from increased lending activity, which tends to drive positive earnings growth. Similarly, consumer discretionary stocks tend to outperform in a recovering economy, benefitting from rising consumer confidence and increased spending.
A rising tide may not lift all boats, and hence, independent of the macro situation, we believe that a strong focus on stock selection within portfolios will be key.
Why Amundi for European SMIDs
Amundi stands out as one of the largest asset managers in the European small and mid-cap sector, with €1.7 billion in assets under management2. Our experienced investment managers, with an average of 17 years in the industry, work in close collaboration with a specialized team of sector analysts on the ground and portfolio managers responsible for country-specific strategies across Europe, including France, Germany, Austria, Italy, and Spain. This local presence allows for direct engagement with companies, a key pillar of the investment process, enabling us to uncover the most compelling investment opportunities.
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1 Amundi Global Investment Views May 2025
2 Amundi as of 30 April 2025
Unless otherwise stated, all information contained in this document is from Amundi Asset Management S.A.S. and is as of 22 May 2025. Diversification does not guarantee a profit or protect against a loss. The views expressed regarding market and economic trends are those of the author and not necessarily Amundi Asset Management S.A.S. and are subject to change at any time based on market and other conditions, and there can be no assurance that countries, markets or sectors will perform as expected. These views should not be relied upon as investment advice, a security recommendation, or as an indication of trading for any Amundi product. This material does not constitute an offer or solicitation to buy or sell any security, fund units or services. Investment involves risks, including market, political, liquidity and currency risks. Past performance is not a guarantee or indicative of future results.
Date of first use: 22 May 2025
Doc ID: 4162300
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