A look at Echiquier Agenor SRI Mid Cap Europe | March 2025
Stéphanie Bobtcheff, CFA, Head of Small & Mid Caps, José Berros, Manager and Philbert Vessières, Senior Analyst
Financial markets rose for the second year running in 2024, bolstered by the start of interest rate cuts and a more favourable economic outlook – particularly in the US. The election of Donald Trump, whose policy proposals are highly favourable to US companies, gave the US market a new lease of life; it ended the year up 27% – almost 20 points ahead of the European indices. Indeed the valuation gap between the two regions reached historic levels at the end of the year.
European small and mid caps, which had accumulated 16 points of underperformance in 2022/23[1], underperformed again in 2024 with a rise of 7% vs 9% for the broad index. Contrary to expectations, the rise in long rates at the end of the year coupled with disappointing growth in Europe weighed on the asset class; indeed it reached historically high discount levels compared with large caps and was trading at a 9% discount at the end of December versus an average premium of 10-15% before the Covid period. It is also worth noting that capitalisations in excess of 10 billion account for most of the growth in the mid cap indices.
TRANSACTIONS
The economy
Although visibility on the economic situation remains poor in 2025, equity markets could turn their attention back to fundamentals in an environment of stabilised interest rates. On that basis, and given their high degree of performance disparity, small and mid-cap markets offer a superb pool for stock selection. Prospects for higher earnings growth in small and mid caps, coupled with the European Central Bank’s ongoing monetary easing cycle, should lead to a sustained revival of interest in this asset class.
Against a volatile economic backdrop, which deteriorated over the course of the year, our portfolio companies once again demonstrated their ability to grow their earnings at a sustained pace. On average, they achieved organic growth of 6% in sales and 12% in operating profit – twice the rate of the MSCI Mid cap Europe index.
The profit outlook for 2025 remains solid, with earnings growth of around 16% currently expected. This reflects the portfolio’s positioning in sectors enjoying structural growth, as well as improved profitability thanks to resilient sales (expected to rise by 10% in 2025) and tight cost control. If the macroeconomic situation in Europe improves, the most cyclical stocks in the portfolio could surprise on the upside. We carried out a number of arbitrages in 2024, with the aim of improving the fund’s growth and quality profile. In particular, we initiated a position in QT Group, the Finnish leader in graphical interface design software, with a growth profile of over 20% a year and high margins. We strengthened our position in ALK Abello, the world leader in the treatment of allergies – an underpenetrated, fast-growing market in which the company generates operating margins of 25%.
Investment strategy
Echiquier Agenor SRI Mid Cap Europe focuses on high-quality stocks with good visibility on future earnings growth, irrespective of the increasingly unpredictable macroeconomic cycle. With an average valuation of 25 times earnings and expected growth of over 15% a year, the fund’s performance should reflect the operating performance of the companies in the portfolio over time.