(BFM Bourse) – The CAC 40 had a prosperous year in 2023, unlike small stocks which were left on the sidelines of the rise. Small caps have not said their last word and the awakening of this compartment could involve a return of liquidity, according to Euroland Corporate.
Last year, the flagship index of the Paris Stock Exchange had a very good year, closing with an increase of 16.52%. During this prosperous year, the CAC 40 repeatedly crossed its historic highs during the session (with a record of 7,653.99 points on December 14) and at the close (7,596.1 points on December 15).
Small and mid-caps, for their part, did not participate in the party. They still clearly suffered from the comparison with their larger counterparts, since the CAC Mid&Small posted starving gains of 1.4% over 2023. Worse still, the flagship index of small and mid-caps Euronext Growth once again finished a stock market year in negative territory, with a drop of 10.3% in 2023. This decline even reached 24.8% in 2022.
The sleep of small caps
In a previous article, we described the reasons which explain the underperformance of this universe of the Paris Stock Exchange. Among them, these values are very sensitive to short-term interest rates. However, the year 2023 was marked by a rapid and violent tightening of credit conditions, which weakened certain companies in this universe.
“Thus, any tightening of monetary policies and increase in policy rates will have a negative impact on the financing capacity of these companies because the cost of capital of small caps increases much faster than that of large caps, which reduces their relative earnings capacity “, explains Quantalys. Furthermore, the macroeconomic context has also weakened these small and medium-sized companies whose backs are less strong than large companies, considered as ocean liners resistant to storms.
The culprits would therefore be quickly found. Another element, more characteristic of this investment universe, also came to play spoilsport: the lack of liquidity. “Another indicator to take into account before investing in small caps: liquidity in the markets. Indeed, the relative performance of small caps is closely linked to liquidity. However, central banks have moved from a policy of “injection of liquidity and expansion of their balance sheet results in a drying up of this liquidity”, Quantalys also recalls.
Last year, this drop in liquidity was significant for small caps. In 2023, volumes fell by around 24% on the CAC Mid&Small index, and even by 40% on Euronext Growth, according to data recorded by Euroland Corporate. “On Euronext Growth, the capital exchanged even increased from 12.1 billion euros in 2022 to 7.2 billion euros in 2023,” notes Nisa Benaddi, associate at Euroland Corporate.
The ideal cocktail for waking up
However, to achieve “this holy grail” of liquidity, the planets must be aligned. One of the major parameters for providing liquidity to a security is the size of the float, that is to say the share of a company’s capital available on the stock market, explains Nisa Benaddi. In percentage terms, below 25% of float, the liquidity of a small caps “is often not significant”, while in value it is the amount that it will be possible to process which will be the reference, specifies the specialist. “Having a float of 2 million euros or 20 million euros does not have the same effect” on the liquidity of a security, she continues.
In addition to the size of the float, the nominal value of the share can help to animate a share. And the lower the share price, the more it attracts a category of “investors likely to invest regularly in the share”, says Nisa Benaddi.
“The penny stock model is illustrative of the point. Below 1 euro, shares can become the target of robots, associated with investors looking for a quick capital gain. These two factors very often generate an abnormally high volume given the size of the market capitalization, often accompanied by high volatility on the stock,” explains the specialist. But without going to such an extreme, a stock price of a few euros is still perceived as more accessible than the Financière Moncey stock which remains at the top, year after year, of the most expensive shares on the Paris Stock Exchange.
Equally important is communication with its shareholders and even more so if it is diversified. According to Euroland Corporate, a modest-sized company has every interest in “benefiting from a balanced shareholder base, between institutional shareholders and individuals, who tend to intervene regularly and directly on the market, where professionals more commonly trade blocks of shares in the context of over-the-counter transactions”.
The financial intermediary cites the example of a company which would tend to favor “capital increases through private placement, without integrating individuals”, at the risk of offending its individual shareholders and dissuading new ones from coming to the capital. .
Pay attention to the origin of liquidity
Regular communication also contributes to better liquidity on a security. Euroland Corporate notes that significant volumes are traditionally observed on the occasion of a company’s publications, “hence the interest of not being content to communicate only within the framework of mandatory publications”, but to do so over time. some water.
“If liquidity is the holy grail sought by listed small caps, we must nevertheless distinguish the liquidity allowing the market to be efficient, from the chimera liquidity observed in a plethora of companies loaded with dilutive instruments. Optimal liquidity is that allowing the creation of the conditions for real value creation on the stock market”, concludes Nisa Benaddi.
Will the January effect – which means that small caps outperform the heavyweights of the stock market during the first month of the year – support this long-awaited awakening of small and mid caps? For the moment, the long-awaited euphoria is not yet perceptible. This segment of values remains in effect, unlike the first days of 2023. Since the start of the year, the CAC Mid&Small index has lost 1.6%*, compared to an increase of 6.5% over the first two weeks of 2023. And on the Euronext Growth side, the observation is identical, with an index falling by 1.2% while it was gaining by 5.3% in the same period of 2023.
* variations stopped at the close of the session on January 11, 2024.
Sabrina Sadgui – ©2024 BFM Bourse