2022 was “awful” for European equities, admits Peter Kraus, portfolio manager of Berenberg’s European Small Cap fund and the European Micro Cap fund, but he says there is no reason to overlook them this year.
Kraus whose funds have a decent long-term track record – they have outperformed the MSCI Europe Small Cap and Micro Cap Indexes by 23.5 per cent and 27.3 per cent respectively since inception in 2017 – but suffered during the challenging economic conditions last year, says the asset class is set to return to favour.
“2022 was awful for European equities,” Kraus says. “We had a recession shock, inflation shock, rate shock, Ukraine shock, energy shock and maybe some other shocks as well. We are a very long-term quality, growth small and very small [cap manager], and the headwinds have never been so severe. It’s not a surprise that we looked like beginners last year.”
However, while Kraus concedes he cannot predict the future, he is optimistic that the headwinds that blew the funds badly off course last year, are set to ease.
“The environment has always been uncertain; nobody knows what is going to happen tomorrow, but we are in a different environment to the one we experienced over the past 12-18 months. I am not saying that things will change in the next couple of weeks, but we are nearing the end of the rate hiking cycle. We have seen peak inflation rates.”
Kraus says fears about a recession in Europe following Russia’s invasion of Ukraine failed to materialise, while energy prices are returning to some normality, all of which bodes well for European equities.
Further, he says European small-cap and micro-cap stocks that are set to benefit from long-term structural tailwinds. For example, Elmos Semiconductor, a global market leader for semiconductors in the automotive industry, which reported 48 per cent sales growth in the last quarter and is well positioned to take advantage of the long-term trend towards electrification of systems and functions in vehicles.
Looking across Europe, Kraus favours Scandinavian companies, and the funds are overweight in the region, notably in Sweden.
Kraus says this is based on “a very strong competitive start-up scene revolving around tech and healthcare companies, concentrated in Stockholm with effective government backing”.
He gives the example of Medistim, the Norwegian global leader in innovative medical devices for measuring blood flow, which has grown its revenues by an average of 10 per cent a year.
“We look for companies with global leading positions in special niches and technology particularly semiconductor equipment and medical technology. Sweden and Denmark have been at the forefront of innovation in these future-oriented technologies.”
Kraus also says that the current markets present opportunities for established active asset managers, arguing that the research demands in the small and micro cap space function as a high barrier to entry to possible competitors.
“The lack of analyst research and broker coverage creates obstacles for small and micro cap managers who need to cultivate local connections/build up strong research teams, in addition to being willing to translate annual statements into English, to get the best out of the small/microcap markets,” Kraus says.
