Large-cap stocks should outperform small caps following the European Central Bank's (ECB) decision t...
Large-cap stocks should outperform small caps following the European Central Bank's (ECB) decision to raise interest rates, according to investment boutique 2CG.
Charles Glasse, one of the co-founders of 2CG, says: "As rates have been rising across Europe, small caps will face difficulties as these types of companies take out bigger loans than larger companies and will generally be more sensitive to any changes. It is possible their balance sheets will become stretched as a result."
Glasse has decided to slant 2CG's European portfolios to favour large caps on the back of the ECB's decision to raise rates, for the third time since 2003, to 2.75% at its 10 June meeting.
According to Glasse, one stock that will benefit from the rate rise is Italian bank Popolari Unite Scpa (BPU). He believes the company's profit margins will improve as consumers pay more on their loans. In addition, he explains as the stock is a large-cap it is not susceptible to takeovers that could affect its management strategy. He says the group has plans to buy smaller banks to help it expand further.
In a different area, Glasse favours French supermarket chain Rallye, which is a subsidiary of the large-cap food retailer Casino. The group has just made a deal with Tesco to provide a loyalty card scheme in France, similar to the UK model. Casino is also disposing of its non-core assets, including a discount market chain in Poland, to help improve profit margins.
However, Glasse has decided to remain underweight food manufacturers because of the competition between non-branded and branded foods. He explains the discount gap between the two has risen to 35% from 20%, which means branded foods will have to start reducing prices to compete.
Glasse has also positioned the European portfolios to capture gains when commodity prices fall. He believes silver, which was trading at $11.20 (£6.08) on 12 June, will fall back to $7 as prices move to beyond sustainable levels.
One stock Glasse says will benefit from the fall will be medical technology company Agfa. It manufacturers x-ray machines as well as press plates for newspapers. He explains this company has had its profits squeezed in recent years due to the increasing cost of silver, but believes when silver prices fall the share price of Agfa will rise.
Eric Bendahan, fund manager of the Oyster European fund, says the volatility of the European market means he has positioned his fund to be overweight financials. He explains: "There could be more volatility for stocks in the second half of the year if interest rates rise further and due to this I have positioned the fund to be overweight financials."
Financial stocks in the Oyster top 10 include Italian bank Unicredito and German bank Commerzbank, which are expanding through acquisition.
For example, Unicredito, also a large cap, has recently acquired German finance group HVB and has announced further plans to expand beyond Italy to Germany, Eastern Europe and Austria. Meanwhile, Commerzbank has acquired mortgage lender Eurohypo to make it the second largest bank in the German market.
Another company Bendahan favours due to its expansion plans is L'Oreal as it has been gaining market share in Latin America and Asia. It is also expanding through acquisition and has just purchased an 89.9% stake in the Body Shop.
He also likes restructuring stories such as brewery Carlsberg, which has recently announced it has plans to cut about 200 jobs in Sweden and 240 jobs in Denmark
European large-cap stocks to outperform
Financial stocks also to outperform
European interest rates to rise
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