Each week, a professional investor tells us where he’d put his money. This week: Eric Labbé 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.
Mediawan (Paris: MDW) is a publisher, producer, and distributor of audio-visual content in French-speaking Europe. Mediawan is looking to acquire film and TV companies, and is vying to become a leading premium-content platform in Europe.
Cybersecurity firm Wallix (Paris: ALLIX) helps customers protect and secure their critical IT assets, including data, servers, terminals and connected devices. As one of the few pure cyber-security players listed in France, Wallix is well placed to respond to the growing security needs of companies, as the increasing threat of cyber attacks requires increasing attention.
Continuing with the tech theme, Solutions 30 (Paris: ALS30) a provider of technological support services, is also promising. The company has been expanding geographically and is also entering new business areas.