Diminishing European Private Equity

Despite the prevailing pessimistic economic outlook in the European Union, the attractively low valuations of European small and mid-cap stocks have captured the attention of numerous investors. The relatively diminished valuations have sparked long-term interest, despite recent concerns about a potential credit crunch and a preference for defensive stocks over cyclicals due to anxieties about an economic slowdown.

Defensive stocks, characterized by consistent earnings that are less influenced by economic cycles, typically involve companies supplying essential goods like power, healthcare, and specific food items. On the other hand, cyclical stocks are more susceptible to economic cycles, with earnings affected during downturns but increasing during upswings. These companies often operate in sectors such as travel, construction, and luxury goods.

European-focused investors argue that the current economic slowdown has already priced in much of the risk for Small-Mid Capitalisation (SMID) stocks. The prevailing belief is that if Europe experiences an extended recession, SMIDs may have less downside compared to larger companies.

In the Artificial Intelligence (AI) sector, recent breakthroughs in generative AI, which involves algorithms creating new content like images, text, simulations, video, and audio, have kept investors focused on major stocks. However, SMIDs with the financial resources to invest in AI are seen to hold an advantage over those lacking such resources.

Analysts with expertise in the field anticipate that European economic data will deteriorate over the next three months, particularly as recent data indicates a technical recession in the EuroZone, marked by negative growth in real GDP for two consecutive quarters. Once there is evidence of an economic upswing across the EuroZone, the revival of small caps is expected, creating a favorable environment for long-term-focused investors.