Small and Mid caps have struggled for the past 3-4 years, but the tide seems to be turning. A recovering economy and falling interest rates may provide that extra push. In particular, the attractive valuation of smaller stocks relative to large market capitalizations presents opportunities for investors. Mark Van Assche, Private Banking and Wealth Office account manager, talks about it with Anthony Cruysmans, expert European Small and Mid Caps at KBC Asset Management.

What to expect at a first 'get-to-know-you' meeting

• In both the US and Europe, the inflation trend is still on the downside.
• Persistant underlying inflation (especially in the services sector) and recent volatile oil prices mean that the disinflation process is proceeding somewhat more slowly than previously thought. 
• Espacially in the US, we are still seeing inflation rates surprise in the interim.

• The exceptional stimulus programmes are being scaled back, but there is no sign of savings drift. 
• Programmes such as EU Next Generation and the Inflation Reduction Act in the US are still substantial and continue to offer considerable support. 
• China is also stimulating its flagging economy. 
• Central banks in the US and Europe raised key rates at an unprecedented pace in an effort to slow growth and cool inflation. 
• In their recent communications, the banks confirm that the disinflation process is still on track but that confirmation is needed before cutting the policy rate. 
• As expected, the ECB cut policy rates and the Fed kept rates unchanged in June.

• Interest rates appear to have peaked.  
• However, a range of inflation data (especially in the US) cast doubt on the timing and magnitude of the expected cut in policy rates. 
• Donald Trump's increasing chances in the race for the US presidency have also recently raised questions about the budgetary impact of his policies. As a result, we still see interest rates making occasional bucks.

• The earnings report for the second quarter is coming up. 
• For the US market, earnings growth of around 8% is expected, which is certainly achievable. The large IT-related companies in particular are driving profit growth. In the second half of the year, however, earnings increases in this market segment may be somewhat over the top and analysts expect a greater contribution from the cyclical sectors. 
• Against the backdrop of slowing economic growth, these forecasts may be a little too optimistic.

• However, the conflict in the Middle East and Ukraine could continue to cause nervousness. 
• Not an easy environment, therefore, for policymakers to take decisions on interest rates. 
• The US elections may also cause volatility later this year.