Investors demonstrated a clear preference for German midcap shares as they bet on the country's economic recovery, Reuters reported.

This shift in focus from blue-chip stocks to midcap companies is driven by expectations of a post-election fiscal stimulus and the potential resolution of the conflict in Ukraine.

The MDAX index, which includes companies like Thyssenkrupp (ETR: TKAG ) and Hellofresh, is now seen as a more accurate gauge for Germany's economic rebound than the internationally-focused DAX index .

The MDAX, with a higher revenue exposure to Germany compared to the DAX, could significantly outperform the benchmark if the German economy, which has contracted for two consecutive years, shows signs of recovery. Deutsche Bank (ETR: DBKGn ) has identified fiscal stimulus and industry-friendly policies as potential catalysts for this outperformance.

Investors like Lemanik portfolio manager Andrea Scauri have increased their exposure to the MDAX, anticipating a surge if the election leads to a government that supports a larger deficit.

Despite the optimistic outlook for midcap stocks, there are risks involved. The market may have preemptively priced in expectations for a more lenient fiscal policy post-election.

Additionally, the aftermath of the election and the situation in Ukraine remain unpredictable, with the potential to dampen investor enthusiasm if outcomes are less favorable than expected.

Goldman Sachs has noted the existing bullish option positioning, which might cap the upside potential if the election results or progress in Ukraine do not meet market expectations. However, the bank still finds certain cyclical European stock indices, like the MDAX, attractive for hedging upside risks.

The MDAX's valuation relative to the DAX is currently at a 2.4% discount, historically unusual given that midcaps typically trade at a premium.

This suggests that there might be room for growth, especially in sectors like industrials and chemicals, which are poised to benefit from an economic upturn and decreasing energy prices.

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