David vs Goliath: Why Nordic Small Caps are an Interesting Alternative When It Comes to the Wider Market

Analysts and asset managers are currently increasingly focusing on the small cap segment. In fact, now is a particularly good time to bet on small businesses. Nordic small caps are currently trading at around 13 times of next year's earnings per share, which represents a record discount to their higher-cap counterparts. At the same time, small Nordic companies are expected to continue to grow faster than large caps. This makes them particularly attractive for investors who want to add high-growth stocks to their portfolio. Swedish small caps look particularly promising at the moment, as they have underperformed larger companies in 2022 and 2023. This has led to historically low valuations. We believe that the Swedish market can recover strongly once interest rates have peaked.

Admittedly, it has already become apparent over the past 18 months that small-cap companies with debt on their balance sheets have been more affected by higher financing costs. Nevertheless, we believe that these companies will see a rebound once interest rates stabilise.

Low valuations in the gaming sector

A slowdown in the economy could have a double impact on Nordic small caps: as companies are highly dependent on exports, directly, and through investor sentiment, indirectly. Regardless of this, this investment universe comprises 2,000 companies that offer a wide range of opportunities. Time and again, windows of opportunity arise to identify companies that are less vulnerable to economic downturns and even thrive in turbulent times.

Among the most interesting sectors is the fast-growing gaming industry. Mobile and video games do not only offer an affordable form of entertainment with a variety of attractive facets. They also bring people together, provide exciting challenges and hold a competitive advantage. The gaming market in particular is likely to continue to gain structural importance. Moreover, the gaming industry is characterised by a highly scalable business model driven by digital distribution, which brings significant economies of scale. We expect a resurgence in demand from gamers, which has slowed somewhat after the Corona boom.

In addition, we observe a pronounced appetite for content among strategic players and expect further market consolidation. Recent examples are the acquisition of Activision by Microsoft and the increasing gaming efforts of companies like Amazon and Netflix. This development points to a growing market. The sector is particularly interesting for investors thanks to its low valuations. Over the next 12 to 18 months, this is likely to be driven by increasing merger and acquisition activity, supported by cheap valuations for small-cap companies and stabilising financing costs.