German small and mid caps: Success in a niche market thanks to unbridled innovative strength

At the end of 1987, the DAX, MDAX and SDAX stood at 1,000 index points. While today the DAX and SDAX are almost on a par at around 12,500 points, the MDAX is more than twice as high at over 26,000 points. Although the DAX is the best-known of the indices, the small indices (including the TecDAX) have outperformed the DAX in terms of price development over the past 15 years.

The success can be attributed to the composition of the smaller indices which contain many of the so-called hidden champions, i.e. the second-tier world market leaders. Driven by innovation and a focus on niche markets, these small companies are often able grow faster than their large DAX counterparts. Smaller companies develop better in upswing phases but also suffered major setbacks during the 2008/09 financial crisis.

Our analysts currently see opportunities for small and medium-sized companies due to their activities in trend themes such as digitization, e-mobility and internet services. Thanks to new technological trends (e.g. cloud computing, Industry 4.0, artificial intelligence, autonomous driving, virtual reality) in connection with higher-performance hardware (e.g. processing power, sensors, cameras, battery technology) and new information collection points (e.g. smartphones, cars, financial data), potentially enormous growth areas are arising for companies in the coming years. Suppliers can expect a flood of orders from the digitization of the financial world and the switch to new drive technologies for vehicles. There are no signs of an end to the boom.

In this world, there will be winners and losers, even within the individual sectors. At the same time, it will take several years for the positive effect to find reflection in operating profits. Companies must first face high investments and structural challenges (e.g. the shortage of IT specialists) – without any realistic idea of how customers will react to the new products. At the same time, the costs for spreading ideas and information will continue to fall enormously and improve the market opportunities for foreign companies, especially from the emerging countries. This is increasingly posing a risk to the importance of technological competence as a competitive advantage. In this world, German small and mid caps can once again rely on their niche strategy while the large DAX companies often leave behind a more cumbersome impression in this respect.

Despite some high valuations, we therefore currently assess the stocks of the MDAX, SDAX and TecDAX in a mostly positive light.

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