Three vibrant French small-cap stocks

published 7 July 2017

Each week, a professional investor tells us where he'd put his money. This week:Eric Labb of CPR Asset Management.

Emmanuel Macron's victory in France's presidential election and his resounding win in the parliamentary election have injected some much needed optimism and relief into French and European markets. For the first time in months, French equities are back on foreign investors' radars. After years of economic fatigue and disillusionment, the wider European cyclical recovery is fuelling growth and raising expectations. We believe Macron's victory and Europe's economic resilience will benefit French small and mid caps. Investors disenchanted with the UK's political and economic uncertainty and with a US economy that's running out of steam should look to this vibrant market.

Macron's economic reforms bode well for small- and mid-cap stocks. Their revenues are more domestically oriented compared with larger-cap companies. They will benefit from the liquidity premium the extra return an investor expects from small caps above other financial securities because they cannot be sold in a hurry so easily. And we are seeing more robust earnings-per-share growth, which we expect to continue as Macron's reforms gather steam.The proposal to reduce employment costs will benefit the more labour-intensive companies, including those in health services and logistics. Tax breaks for research and development will reward firms for investing in innovation. And lowering the corporate tax rate from 33% to 25% in the next five years will be a boon to companies with a tax base mainly in France. It's easy to conclude that valuations are looking a bit expensive at the moment. Take a look at the Stoxx 600 index and you will find that 30% of stocks are just 5% below their ten-year highs. And French small and mid caps have outperformed large-cap stocks by 8% in the past three months, suggesting we are entering pre-crisis valuations. Nevertheless, we expect the following three firms to outperform.