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00:00Specifically on all those small cars. And Nicholas, the fund has outperformed. I guess the question for for our audience is, given where monetary policy settings are right now in Europe and the US, is the door still open for further exposure to the European small cap story, or is that starting to close? Good morning. Good morning and thank you very much for hosting me this morning. Yes, I think the European small caps have done very well so far this year. But I think this outperformance has legs. First of all, you have robust earnings growth for the European Small cap Index around 13%. And if you're a good selector, should do better than that. So sorry for the noise. Second two, we have very attractive valuations. We have European small caps trading as you show on your graph at a significant discount, one of the largest ever. It's it's been it was a bit higher at the beginning of the year but still very significant. Third, we have a strong resilience because only 11 to 12% of revenues on small caps are exposed to the US weather compared to around 24% for large caps. And you have an increasing fiscal spending, notably in Germany with the favorite billion fund. You have the ECB cutting rates and moving central banks around the world, probably cutting rates. You can see as well that the rally technically has been healthy, is broad based, with more than half of micro and small caps trading above their 100 day moving average. You see the inflows coming back for the first time in a very long time. And and and I think that's that's very, very encouraging. What assumptions, Nicholas, are you making about the fundamentals of the eurozone economy into 2026 with that positive view on European smallcaps? We don't we don't have to be very aggressive. We take the consensus view for a very minor growth supported by interest rate cuts and these these stimulus programs. And that should be enough. That should be enough. You have to remember that the activity has been very slow for 3 to 4 years. So all these companies have been very cautious on the cost of managing their margins. And we see rising backlogs. Nicholas Treaty in London. What are the cases against betting on small caps right now? Simply that if there is a persistent tariff threat on either side of the Atlantic, it's the bigger companies with larger liquidity profiles, larger cash cushions that can weather the storm better. Is that something that the small cap space is prepared for? Well, we focus on a lot of small caps that are interesting, that are, you know, focuses domestically in defense, in construction, in in real estate, in in financials. And so I think these small gaps are very much protected from these from this war. Of course, they are some small gaps because it's a diverse universe that will be exposed to us. Tariffs could be, you know, in luxury and could be in spirits, could be in the capital goods. But we are we are we're away from most of these stocks. So, Nicholas, and you make the point that a lot of the bull case for small caps rests on that fiscal spend that's coming from Germany. The broader Europe, European story as well. There is a question, however, specifically in the defense sector, which you just outlined as well. But perhaps that fiscal spend doesn't come through in its entirety. Is that possibility priced into the market? Well, the market has been as being cautious so far. We we shall see. I think the market is anticipating a rise in fiscal spending for the next 2 to 3 years. And we we shall see this essentially in 26. We haven't seen much in 25 because it takes time for these measures to go through parliaments, to be voted into laws and so on and to and to be implemented. So we expect that to to happen in 2026. And that ties in, of course, to what we're saying on defense, Nicholas, which is a sector that I know you favor, where within the defense baskets do you want to be positioned right now? Well, I think you you want to be diversified. Initially, we wanted to be more exposed to, you know, things like ammunitions and and hardware. We still want that, but we want to be maybe more to two, some more long term beneficiaries, companies that will benefit from the switch to drones to artificial intelligence to the, you know, the war of robots where we're going to get into. And I think there are some companies that will will benefit from those trends. Nicholas, I want to take a kind of massive zoom out, if I can. Where are to the clients you're speaking with, The money that you're managing, the investments that you're making. Do you see or do you feel like you're in the consensus here that that fund flows? Global fund flows favor small caps right now. I don't know if Global Global Fund flows favors small caps. What we have seen for us and a few others in Europe is that for 15 years we only had outflows. Investors. We are favouring various asset classes and even in the last three years they were favouring ETFs when they were investing in Europe. So in active fund managers, we've seen flows only this year really coming back. So I think it's the first time in in 15 years. So I think there's there's a lot more room to go. And coinciding with the picture I've I've showed you the fact that the small caps are cheap, traded at low multiples. They have strong backlogs raising EPS. I don't see that as a I feel very comfortable.

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Walewski: European Small Caps Out Performance Has Legs

Alken Asset Management Founder Nicolas Walewski says EU small caps have had robust earning growth and are trading at a significant discount. "We have strong resilience because only 11-12% of revenues on small caps are exposed to the US, compared to around 24% for large caps," Walewski said. He spoke on "The Opening Trade" on Bloomberg TV on August 25. (Source: Bloomberg)

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