Cac 40: Why small populations have underperformed CAC 40 for several years

(BFM Bourse) – With the exception of 2020, the CAC Mid & Small has significantly underperformed the CAC 40 since 2018. Small stocks have suffered from adverse economic conditions and ebb and flow movements, while the CAC 40 has benefited from the sparkling form of luxury values.

These are stocks for which the market is supposed to represent an important financing relay, but which are facing problems: small and medium-sized companies.

As the chart below shows, these titles have suffered since 2018 compared to the big names in the Paris market. Thus, the CAC Mid & Small index – with the exception of 2020 – lags behind the CAC 40 every year. This also applies at the beginning of 2023, when the barometer of the flagship of the Paris market took more than 15.35%

since January 1 compared to barely 5.15% for CAC Mid & Small. The underperformance is partly explained by the strength of luxury on the CAC 40, a sector with very little presence in the smallest caps. But in the long run, there are many other reasons.

“The underperformance of small- and mid-caps comes after years of outperformance relative to the CAC 40. During this period, these stocks have benefited from structurally much stronger earnings growth rates, on the order of 15% to 20% annually. easier to get these rates when you are an SME than a large company, which is considered more like an ocean liner, certainly resistant to storms, but slower in the recovery period,” explains Vincent Le Sann, Deputy CEO of Portzamparc.

“We have to go back a few years (to see this underperformance, editor’s note) because recession risks emerged in 2018,” noted Julien Fauvel, manager of Talence Gestion, on BFM Business in late April.

“The turning point was June to July 2018, when the market turned around and valuations of small and medium-sized companies were very high at that time,” adds Pascal Quiry, professor of finance at HEC and co-author of Vernimmen shares. market newsletter.

A wave of withdrawals

The smallest values ​​are penalized by low liquidity, which itself is a consequence of the significant outflows that have occurred in recent years.

“Since 2018, there has been the first collection of profits on these values. And since 2019, outflows from funds specialized in small and medium-sized companies (there are around 200 of them in France),” recalls Vincent Le Sann.

“This outflow has created a form of a vicious circle. Mid- and small-cap companies are characterized by lower liquidity. When you put a lot of stocks for sale in this market, you don’t have many buyers in front of them,” the mechanical movement down. The outflows thus lead to the downfall of this small-value market, which itself underperforms the outflows even more. It’s a negative spiral from which we try to escape,” explains the specialist.

Another big blow to bamboo is due to less favorable economic conditions. “As soon as the economy deteriorates, the market will return to large stocks. Covid, inflation, all these elements weigh on small and medium-sized companies, because these companies suffer on average more than large ones when the economy loses strength. speed”, underlines Pascal Quiry.

“There has also been a greater perception of risk. The last few years have been marked by the health crisis, the conflict in Ukraine and the global economic slowdown. All of these macro-economic events inherently penalize mid- and small-cap companies as investors favor the largest groups.” The idea is that the liner will always survive a storm where a small engine risks being swept away by a wave”, adds Vincent Le Sann.

A move that will likely last

The wave of IPOs on the Paris Stock Exchange that have taken place since 2018 and which have largely involved small companies may also have played a role. “We can notice that there have been many IPOs (initial public offerings, editor’s note) in the last three” and “many companies have used windows to express high valuations,” notes Julien Fauvel. “Obviously we have a return to normality in the rate hike phase,” adds the manager.

“If we look at the IPOs that have happened in recent years, 5/6 of the companies are trading below the IPO price, which tends to prove that they were listed at too high a price. And the more you ‘little beings’ the more likely that there will be a decline after the introduction”, clarifies Pascal Quiry.

What is needed to reverse the trend and for SMEs to regain momentum in the stock market? “The economy must be better and less unstable, less unpredictable. This will probably take some time, it is not for tomorrow,” judges Pascal Quiry.

“Everything will be linked to the perception of the economic cycle, and thus the recovery of the economy. From the moment when there is a noticeable economic recovery, small and medium-sized companies will start to outperform again and we will be able to move from a vicious circle to a virtuous circle, with a return on collection,” he confirms Vincent Le Sann.

The variation stopped at 12 noon on Friday.Julien Marion – ©2023 BFM Bourse

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