“SMID is beautiful”… except for France – 06/21/2024 at 4:04 p.m.

“SMID is beautiful”… except for France – 06/21/2024 at 4:04 p.m.
“SMID is beautiful”… except for France – 06/21/2024 at 4:04 p.m.

Europe faces significant structural challenges that impact its productivity compared to the United States. Among the factors contributing to this disparity: the fragmentation and regulation of markets, a high proportion of small businesses, high taxation and lower R&D spending. However, since the global financial crisis of 2008, these disadvantages have not worsened; in fact, many have become less damaging.

Small businesses represent a significant part of the European economic fabric, especially compared to the United States. American companies with 250 or more employees represent 59% of salaried employment, compared to 43% in Germany and 48% in France. Small businesses often allocate resources less efficiently than larger ones and are slower to adopt new technologies.

Investors are therefore right to wonder: can small businesses capture the future added value created by the artificial intelligence revolution?

We aim to demonstrate that, by definition, small businesses will participate in any Schumpeterian evolution, because progress always eventually wins over the entire economy.

The next question is: when?

We believe the time is right to reposition for greater value creation, and we see the beginnings of this in the new positive earnings per share (EPS) trend. But first let’s look at the theory.

Fama and French, among other researchers, have shown that small-cap stocks tend to outperform large-cap stocks over the long term. Historically, investors have been willing to pay a premium to acquire small and mid-cap stocks, recognizing their higher growth potential than large caps.

However, in times of heightened macroeconomic uncertainty like today, investors are more likely to look to the relative safety of large caps. Small company stocks often face balance sheet risks; their sectoral or geographic concentration is stronger and they may lack the scale to absorb significant economic shocks.

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