FRANKFURT (dpa-AFX) - Economic hopes surrounding the new German government's billion-euro infrastructure package have been driving German small caps strongly for several months. The SDax index of smaller small caps is already at record levels, and the MDax has had a very good start to the year, at least by international standards. Hopes for a revival of the German economy are therefore high, but this is not without risks.

"Anyone investing in German small caps today is betting on the productive core of the German economy – technology-driven, entrepreneurial, and often underestimated," says Blanca Habbel, portfolio manager at Vermogensverwaltung Habbel, Pohlig & Partner.

In the long term, stock buyers have done well with local small caps. Since the introduction of the SDax and MDax indices at the end of the 1990s, they have outperformed the German benchmark index, the Dax. The MDax, which tracks mid-cap stocks, has seen the most significant gains.

The main reason for this lies in the stronger growth potential of small and medium-sized companies, explains portfolio manager Andreas Feldmann from B&K Vermogen. These companies are "often more agile, can adapt more quickly to new market conditions and, in many cases, are highly specialized niche providers – so-called 'hidden champions'."

However, in generally poor stock market years, smaller stocks often suffer more than large ones. This was also evident in 2022, which was marked by inflation concerns and Russia's invasion of Ukraine. The MDax and SDax fell sharply that year. In addition to the rise in interest rates at the time, Feldmann points to economic weakness in Germany and Europe, structural problems such as high energy prices and bureaucracy, and geopolitical uncertainties.

However, the tide has now turned for the better, at least with regard to inflation. Lower interest rates mean that loans are now cheaper to obtain. This raises hopes that local companies will invest more and consumers will spend more. Both would boost the German economy. The German billion-euro package for the renewal of the partly dilapidated infrastructure should provide an additional boost.

"Falling interest rates, government investment, and attractive valuations are like fertilizer after a long drought," says expert Arthur Enders of RP Rheinische Portfolio Management GmbH. The MDax provides stability, while the SDax offers more momentum. However, according to Enders, anyone wishing to invest in SDax companies should not only see the opportunities, but also be prepared to withstand fluctuations.

According to experts, the reason for the different risk profiles of the indices lies in their composition. "While the MDax is more internationally oriented and includes many globally active medium-sized companies, the companies in the SDax largely reflect the state of the German domestic economy," comments Harald Sporleder, chief investment strategist at Lingohr Asset Management. In this respect, the SDax is particularly sensitive to economic developments in Germany itself.

A lot therefore depends on the implementation of the planned government investments worth billions in areas such as bridges, railways, and IT infrastructure, as well as on the government's promises to reduce bureaucracy and speed up planning procedures.

According to the "Wirtschaftsweisen" (economic experts), the German economy is still in a "pronounced phase of weakness." From the perspective of these experts, it is anything but certain that Germany will return to economic success in the medium and long term. In their view, bureaucratic requirements and lengthy approval procedures are slowing down growth. /la/ag/mis

--- By Lutz Alexander, dpa-AFX ---