Core Viewpoint - European small-cap stocks are becoming a safe haven for investors amid the reshaping of global trade dynamics, benefiting from stronger domestic demand and successfully avoiding the dual impacts of tariff risks and euro appreciation [1][2]. Group 1: Performance and Trends - The STOXX European small-cap and mid-cap indices have risen by 9% and 11% respectively this year, outperforming the large-cap index which increased by 7% [1]. - Small-cap stocks have a lower dependence on cross-border trade compared to large-cap stocks, making them more resilient to potential tariff threats [1][2]. - European small and mid-sized enterprises have recorded net inflows for 10 consecutive weeks, marking the longest streak since 2021 [1]. Group 2: Geographic and Structural Advantages - Small-cap stocks benefit from a geographic isolation that shields them from the impacts of changing U.S. tariff policies, with approximately 60% of their revenues coming from Europe compared to 35% for large-cap stocks [2]. - The uncertainty surrounding potential tariffs, such as the rumored 15% rate, highlights the defensive characteristics of small-cap stocks [2]. Group 3: Currency Dynamics - The euro has appreciated over 12% against the dollar this year, currently trading around 1.17, which poses challenges for larger companies but is advantageous for small-cap stocks [3]. - Analysts predict the euro could reach 1.20, further benefiting small-cap stocks that are less exposed to international business [3]. Group 4: Valuation and Market Sentiment - Historically, small companies enjoyed a valuation premium over large companies, but this trend has reversed in 2023 and 2024 due to rising inflation and interest rates in Europe [3][4]. - The discount of small-cap stocks relative to large-cap stocks peaked at 11% in March but has narrowed to 6.5% [3][4]. - The expected P/E ratio for the STOXX European small-cap index is 13.4, lower than the 14.3 for large-cap stocks [3]. Group 5: Policy Support and Economic Recovery - The macroeconomic environment is improving, with Germany implementing large-scale spending plans and the European Central Bank beginning to lower interest rates, providing additional support for small-cap stocks [4]. - The SDAX small-cap index has surged nearly 20% since February, while the DAX blue-chip index has only increased by 8.4% during the same period [4]. - There is potential for small-cap stocks to be revalued favorably relative to large-cap stocks in the next 12 months [4].