Difficult years…

However, since 2022, we have seen a reversal of this long-term trend, with large-cap stocks driving the market and smaller companies lagging behind.

This underperformance can be explained by a combination of negative factors that have penalised this asset class. For example, worsening geopolitical tensions, rising energy prices and supply chain difficulties have led to a sharp rise in inflation, forcing European monetary authorities to raise interest rates significantly.

Such an environment is particularly negative for small and mid-cap companies, which are more sensitive to cyclical developments and generally more dependent on external financing.

In this context, it is mainly large companies, particularly large US technology stocks, that have attracted investors’ interest.

...despite structural factors that remain in place

Generally speaking, regardless of the market environment, small and mid-cap companies have undeniable advantages: these are entrepreneurial companies at an interesting stage in their development, with flexible and adaptable business models. They are also widely recognised for their expertise in cutting-edge and/or niche sectors, giving them a strong position in their markets.

Another structural factor favouring European small caps is that investors are generally under-exposed to this market segment: while small- and mid-caps account for 14% of general European indices, investors allocate only between 7% and 10% of their European equity assets to this segment[1].

... reinforced by a momentum that appears particularly positive

2025 looks set to be a pivotal year. The changing dynamics of the global economy should enable this asset class to bounce back.

In the United States, government policies are casting doubt on the resilience of economic growth, the trajectory of inflation and the strength of the labour market.

In Europe, the economic situation appears to be improving, with controlled inflation, lower interest rates, a strong labour market and more positive market sentiment, boosted by announcements of massive investment plans in infrastructure and defence.

Small and mid-cap companies appear to be particularly well positioned to benefit from this more favourable environment.

Firstly, after several years of marked underperformance, valuations of the smaller cap segment are attractive compared to their larger peers, offering significant catch-up potential

Secondly, historically, small- and mid-cap companies tend to outperform large caps during periods of monetary easing. This is because large caps are generally more prevalent in cyclical sectors (industrial, consumer discretionary) that benefit from interest rate cuts.

In terms of earnings growth, smaller stocks are also currently performing well. The MSCI Europe general index forecasts earnings per share growth of only 2% in 2025 and 12% in 2026, compared with 13% in 2025 and 16% in 2026 for the MSCI Europe Small Caps index[1].

Last but not least, amid uncertainty surrounding changes in US tariffs, the greater exposure of small- and mid-cap stocks to the European domestic economy is a significant advantage, further reinforced by the recent appreciation of the single currency against the US dollar, which is penalising exporting companies.

A market to be approached from a quality perspective

Smaller companies are generally less covered by external research, resulting in a greater number of market inefficiencies that can be exploited.

We believe it is essential to approach this market with an active and highly selective quality-focused approach in order to favour companies whose fundamentals are strong enough to navigate diverse market conditions. As such, the key selection criteria are: the presence of one or more competitive advantages, a strong balance sheet and the ability to generate profitable growth.

The BL European Small & Mid Caps Fund exploits the potential of this market with an approach focused on the quality of fundamentals and the identification of long-term competitive advantages.

In terms of market capitalisation, we target companies with a market cap of between €500 million and €15 billion at the time of initial purchase.

The Fund favours pure players for which it is easy to identify the main growth drivers.

Author: Tom Michels, Lead Fund Manager, European Small- & Mid-Caps @ BLI – Banque de Luxembourg Investments

Main associated risks: risk of capital loss, equity market risk, discretionary management risk, concentration risk, liquidity risk, currency risk.

Disclaimer: Marketing communication. Please read the prospectus and the KID of the Product mentioned before making a final investment decision. These documents are available free of charge on request by post (BLI - Banque de Luxembourg Investments, 16, boulevard Royal, L-2449 Luxembourg) or by e-mail (info@bli.lu). BLI will be able to advise you of the languages in which each of the Documents is available. A summary of investors' rights is available on the BLI website

(https://www.banquedeluxembourginvestments.com/en/bank/bli/legal-information).

La Française Financial Services has a distribution agreement for BLI products.

Finally, BLI points out that it may decide at any time to cease marketing the Product subject to compliance with the applicable legal and regulatory provisions.

© BLI (RCS B20479) – October 2025