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Deep Dive: Banking worries add to already sour European small-cap outlook

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Eve Maddock-Jones, Investment Week, 17 March 2023:

The ramifications of the biggest banking failure in 15 years, combined with the woes faced by Credit Suisse, have done nothing to help the already grey outlook for European small-caps in 2023.

While the US regional banking crisis is not directly a European issue, Peter Kraus, head of small cap equities at Berenberg Wealth Asset Management, argued that despite the size of these companies, they demonstrate the issues he has with banks and other comparable financial companies, which he described as “high risk investments”…

US firm Silicon Valley Bank collapsed at the end of last week due to the idiosyncratic nature of its business and lack of coverage on deposits becoming apparent as rising interest rates pushed its largely undiversified client base of cash negative start-ups to the doors.

Shortly after SVB’s implosion, Credit Suisse also found itself in trouble, leading to multiple suspensions across the European banking sector…

While Credit Suisse and SVB are two separate events, the fears of more integral banking system issues flaring up have been widely felt in equity markets, especially in Europe.

European equities have already been dealing with the negative sentiment of macroeconomic events for over a year.

As James Carthew, head of investment companies QuotedData, said: “Ukraine, soaring energy prices, rising inflation and interest rates – there are many reasons to expect that European stocks would have struggled to perform recently and, since smaller companies are often perceived as more vulnerable to economic shocks, you might have expected that they would have been hit even harder.”

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