Jefferies highlights European mid-caps as attractive stock picks for investors

Investing.com -- The backdrop for European mid-caps is improving, Jefferies analysts say, arguing that the long stretch of underperformance may be turning as macro conditions improve.

The broker points to the German stimulus, easing inflation, and prospects of a ceasefire as catalysts for re-rating growth sectors and cyclical names.

After a volatile first half marked by “persistent inflation surprises, tariff tensions, and a cautious recalibration of rate cut expectations,” European midcaps remain in a “valuation limbo,” analysts wrote.

They noted that while the ECB has started its easing cycle, “the pace and magnitude of further cuts remain uncertain, especially amid sticky services inflation and geopolitical noise.”

At the same time, the AI-driven rally that defined the first half has concentrated flows into large-cap tech, leaving small and mid-caps (SMIDs) “under-owned and undervalued.”

Against this backdrop, Jefferies raised its ratings on six mid-cap names. Basler was lifted to Buy, with analysts saying they do not believe the company’s full potential has been reached, citing recovery prospects in consumer electronics and industrial automation.

Cancom was also upgraded to Buy, as “the latest guidance revision could represent a turning point, with signs of improvement expected in 2H25 as public spending rebounds,” a team led by Martin Comtesse said.

By contrast, Friedrich Vorwerk, Dermapharm, Fugro, and Alfen were all downgraded on concerns ranging from profit-taking to stalling growth and mid-term uncertainty.

Jefferies outlines five key themes driving opportunities in European mid-caps. Oversold cyclicals such as Aalberts, Fuchs, and Befesa could rebound if a “softer landing and materializing pent-up demand” take hold.

Structural winners, including Arcadis, Beijer Ref, DO & CO (VIE:DOCO), IMCD, and PVA (ETR:TPEG) are described as mispriced, with volatility presenting entry points into long-term growth markets.

A consumer recovery, supported by moderating inflation and more favorable rates, is expected to benefit InPost, Sixt, and Thule.

Bechtle and Cancom are highlighted as prime beneficiaries of Germany’s historic stimulus package, while Belimo and Munters are seen as poised to capture AI-driven demand for liquid cooling in data centers.

The analysts note that relative valuation spreads between mid-caps and large-caps remain historically wide. With positioning still light, they believe the second half of the year could offer a constructive backdrop for re-rating, particularly in quality cyclicals and export-oriented companies.