Why France’s small-cap stocks are so resilient

Investors are understandably nervous about France these days. While money flooded into European equities late last month, French portfolios recorded net withdrawals. And when investors become risk-averse, they tend to ditch smaller companies, which are highly volatile and cyclical, in favour of big, stable blue-chips who earn much of their money abroad, thus tempering local exposure.
But a closer look at the French market shows it’s not working out that way, says John Murray Brown in the Financial Times.

The blue-chip CAC 40 index is marginally down in 2017, and has only risen by 9% since Europe’s stockmarket rally really got going in November. The CAC Small index has gained 19% in three months and almost 4% this year. The more political worries flare up, the more the small caps outperform. So what’s going on?

Investments in small companies are “more concentrated with French investors, who can handle the political factors and are more relaxed than foreigners”, Julius Baer’s Christoph Riniker told the FT. Locals are less concerned than foreign investors about the odds of a Le Pen victory, and reckon that if she does win, it won’t just be France’s problem anyway. They also recall that markets rebounded fast after the Brexit vote and Trump’s election.

Meanwhile, they are concentrating on the cyclical upswing, which is good news for domestically focused equities. Cyclical companies comprise 82% of the Small index, compared with  57% of the blue chips. France is one of Europe’s bigger small-cap markets, so some international investors will be providing additional momentum. Finally, small caps are still extremely cheap: in price-to-book-value terms, they are at 2005 levels.