Small stocks get rid of fears of a crisis and try to get rid of companies with more capital

Prolonging stock market gains seems like a complicated task. With the large indices showing signs of overbought, the smaller listed indices are starting to regain ground with the market. Experts agree that after the first attack, investors began to rotate their investment portfolios towards the smaller listed companies that had been left behind. A trend that, despite its prevalence, is taking a prominent role in the Spanish stock market. Since hitting its lowest levels for the year last May, Ibex Small Cap is up 9%. With this rebound, the index which includes small companies is advancing by 14.49% and trying to surpass the Ibex 35 which adds up to 15.68%.

Small Spanish stocks distance themselves from what is happening in other European markets such as the French markets and become similar to the US markets. The small Cac is up 2.93% so far in 2023, far off the 14% rise in the Cac 40. For its part, the Russell 2000 is up 15.61% since May, a recovery that has helped it hold back losses and post a 12.7% lead for the year compared to the 18.9% increase recorded by the S&P 500.

Natalia Aguirre, director of strategy at Renta 4, notes that the relative improvement seen in small-cap stocks in the past two months is due to the lower likelihood and likelihood of a recession finally occurring. Make a soft landing. After months of speculation about the potential impact on the economyA sharp rise in the interest rateThe indicators show greater resistance, especially with regard to the services sector. Although the specter of recession still hangs over the markets, investors are hoping to finally avert it. Aguirre notes that this hope means increased risk appetite and has “helped investors turn their sights towards values ​​that they had previously not considered due to their lack of liquidity.”

Low valuations by small listed companies are seen as an opportunity to enter a solid business at attractive prices. The purchasing and retention manager thinks so. From the company they consider that the prevailing uncertainties currently create the appropriate ecosystem for a bull market in small capitals. Julián Pascual, the chief executive, indicated this week that they have shed large-value holdings like Alphabet, Amazon, Microsoft or LVMH Corporation and entered high-quality smaller companies like Catalana Occidente. The director explained that small-cap stocks are trading at their lowest levels since 2008, the worst year of the financial crisis.

An idea shared by Alfonso Di Gregorio, Chief Investment Officer at Finaccess Value. The manager notes that globally penny stocks are trading at a 20% discount, the highest level in the last 20 years. “There are companies that have good deals in terms of price points,” he says. Lower valuations have been leveraged by the manager to incorporate smaller companies like Prosegur Cash into its portfolio, which are up just 4.5% on the year, while the Bloomberg consensus gives it a potential of 47.6%.

Beyond portfolio turnover, composition is another reason why the small business index is performing so well. Of the 30 stocks that make up the Spanish pick, only seven escape earnings, with cuts ranging from 51.41% for Urbas to 1.6% for OHL. Another 12 records more than double the gains of the index. Above all, Tubos Reunidos (197.56%) and Berkeley (134.08%) stand out. The mining company’s revaluations were driven by the political situation. Experts point out that the victory of the People’s Party in the regional and municipal elections last May and the possibility of a change of government could lead to the dismantling of the Salamanca uranium mine project, a plan rejected by Executive Director Pedro Sanchez.

Ibex Small Cap has representatives from some of the sectors that saw bigger rises, such as renewable energy (Audax up 74.25%) or artificial intelligence (Synthetic Air up 108.4%), as well as some securities subject to Takeover bid in recent months (Opdernergy adds 49.2%).

Diego Morin, an analyst at IG Markets, is looking forward to the coming months, and he is confident about it. After the punishment suffered by the problems of access to financing with central banks raising interest rates, the expert expects that a possible ceiling on the money price will contribute to prolonging the gains of the stock market for these listed companies. “They could do better in the second part of the year,” he noted. More skeptical is Juan Jose Fernandez Fijars, chief investment officer at Link Gestión, who believes that in a context where low trading is a growing problem, low valuations for small stocks may not be reason enough to extend gains.

The Ibex Medium cap is left behind

lagged behind. The strength that small publicly listed companies are beginning to show contrasts with the apathy of mid-sized companies. Ibex median cap lags behind, recording 5.16%. Alfonso Di Gregorio, chief investment officer at Finaccess Value, believes this poor performance is largely due to the composition of the index. While the Ibex Small Cap includes representatives from some of the more thriving sectors, the sector with mid-values ​​is mainly made up of companies from the food sector or insurance companies. In other words, two of the worst-performing companies in recent months. To the composition, the manager adds the scant coverage that analysis firms have and the fact that many of these firms do not pass the ESG filter, so remain outside the investment realm of many funds.
risk. Although there is growing optimism about signs of a soft landing, a recession cannot be ruled out. It is in this particular scenario that smaller listed companies tend to do worse. The best example of this is the situation that occurred in 2008 and 2011. Simultaneously with the great financial crisis, small capital fell by 57.3% and after three years it fell by 25.1%.

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