European small-caps offer "tactical catch-up opportunity," Barclays analysts say
Investing.com - European small-cap equities offer an opportunity to investors following a period of underperformance and slightly improving economic data in Europe, analysts at Barclays (LON: BARC ) have said.
These stocks dropped significantly in early January as worries over the inflationary impact of U.S. President Donald Trump's trade policies on Federal Reserve interest rates and global growth partly contributed to a surge in global bond yields. Higher yields tend to push up financing costs for smaller companies and limit their ability to refinance debt.
"European yields rose in lock-step with U.S. yields to mid-January and to levels that were starting to cause some alarm in fiscal- and growth-constrained Europe mid-month," the Barclays analysts said in a note to clients on Tuesday.
"Thankfully, slightly better than expected core [consumer price index] number in the U.S. led U.S. yields to fall and European yields have followed suit, alleviating some of the immediate pressure."
Small-cap stocks are now at an all-time record low valuation compared to their larger peers, the analysts noted. However, they flagged that, even though yields have fallen, the relative performance of small-caps has not yet recovered.
At the same time, economic data out of the Europe has pointed to signs of stabilization which, combined with more growth-oriented monetary policy decisions by the European Central Bank, "remains broadly supportive of equities," the analysts said. In particular, a forward-looking composite reading of activity in Europe's services and manufacturing sectors has returned to expansionary territory, while a weaker euro is seen bolstering the region's export-oriented businesses, the analysts argued.
"We tactically upgrade small-caps to 'positive' given the asymmetry that has opened up between their underperformance and [the macroeconomic environment]," the analysts said. "The cause of [small-cap's] recent sharp underperformance [...] has largely reversed, but their performance remains rock bottom, giving them a positive short-term positive asymmetry."