Equita's expectations and assessments of small and mid caps

Global stock markets they closed the month of April in negative territory (Global Equities performance recorded -3% in the month and +4% since the beginning of the year). The markets thus took a breather after the strong run started in October 2023 (+22% from the lows was recorded. The performance was caused by the re-emergence of geopolitical risk and from the fears of one slowdown of the US economyfollowing some disappointing macroeconomic data and inflation that surprised on the upside, fueling the risk of stagflation and probability of delaying the rate cut by the FED. This is what emerges from an analysis by Luigi De Bellis, Co-Head of Equita's Research Office on the Italian market and in particular on small and medium capitalization companies.

The most significant macro data

LUS GDP growth in the 1st quarter was weaker than expected: +1.6% on an annual basis against the +2.5% expected and compared to +3.4% in the last three months of 2023. A setback caused by slower growth in public spending, strong growth of imports and an increase in energy prices for consumers

Manufacturing activity in the USA continued to increase in April, but at an expanding rate slowing down (manufacturing PMI at 49.9 from 51.9 in March, services PMI at 50.9 from 51.7 in March), while there was a slight improvement in activity in Europe (composite PMI at 51.4 from 50.3 in March) thanks to the services component (PMI at 52.9 from 51.5), while the manufacturing segment is still weak (PMI at 45.6 from 46.1 in March).

The performance of stock markets

The European indices they recorded a better performance compared to the main ones American markets (Eurostoxx600 -0.2%, FTSEMIB -0.2%, FTSE Italia All-Share -0.2% better than S&P500 -2.6%, Nasdaq -2.6%, Russell2000 -5%), starting to recover part of the evaluation gap (12-month forward P/E of the S&P500 at 20x compared to 13x of the STOXX600), presumably justified by the expectations that the ECB's rate cut will come before that of the FEDand thanks to the relative improvement in economic activity in the euro area compared to the USA.

Advice on Italian SMEs

In Italy, the financial sector it proved itself again very solid (FTSE Italia All-Share Banks +5.5%) driven by expectations of a good quarter and a reduction in concerns regarding the risk of recession.

However, the compressed valuations of small-caps (both in absolute and relative terms compared to international indices) have instead pushed further potential delistings: during the month theTakeover bid on Salcef by the reference shareholder Finhold and Morgan Stanley Infrastructure Partners, the OPA on IVS by Lavazza and the majority shareholder IVS Partecipazioni, theTakeover bid on Saes Getters by SGG Holding (vehicle of the Della Porta and Canale families, majority shareholders of the company).

“We continue to be constructive on Italian mid-small caps: historically, these have outperformed, on average, at the beginning of the rate cut cycle. – underlines the expert – We expect that the ECB will soon proceed with a rate cutwhich should act like positive catalyst for mid-small caps and for flows on the stock markets”.

We confirm ours neutral view on the markets but with an inclination slightly more constructive in light of the signs of stabilization of macro indicators in Europe and awaiting the ECB's next rate cut, which could direct flows especially towards mid-small caps. Our base scenario – continues the Equita analyst – involves one modest economic growth, but which does not result in a recession, with central banks gradually reducing real interest rates and/or injecting new liquidity into the system. In our recommended portfolio, we reinvest the liquidity obtained during the month from the ex-dividendand we bring the weight of the invested to 91.7% (compared to the neutral weight of 90% and from 91.3% of the previous month)”.