UBS remains hopeful of a “Goldilocks” year for the space, believing that falls during 2022’s worst performance since the late 1990s have been overdone.
It has been encouraged by a summer of modest outperformance after small and mid-caps made a return of 0.5% in July and August against blue-chips stocks at 1.7% lower.
While high interest rates and economic uncertainty continue to weigh on sentiment, the bank notes that on some metrics European small and mid-caps are at very “attractive value levels”.
It adds that investors would do well to remember the longer-term record of small and medium-cap stocks. Since inception in December 2006, its top 20 portfolio is up by 573% after benefiting from a run of outperformance over large caps across the past two decades.
UBS said: “Most investors tend to believe that small-caps generally underperform significantly during periods of uncertain macro conditions similar to what we are currently witnessing, but over a longer time frame, small-caps outperform by a very big margin, which makes it very attractive to remain invested in them.”
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It notes that the cost of financing is not much more of a problem for many quality unleveraged small-caps and that a current multiple of 12.5 times earnings looks favourable against the Wall Street equivalent at 22 times.
UBS said: “We view 2023 as an interesting year for the small-cap space, and continue to recommend exposure to quality names where we see alpha through active management.”
The top 20 list is up 6.6% so far this year, slightly outperforming the MSCI European Smallcap Index following its 5.4% rise.
Out of more than 1,000 floated small-caps in Europe and the 400 in UBS’ coverage, UK stocks feature heavily in the top 20 list through the continued inclusion of Computacenter (LSE:CCC), Hays, Hiscox Ltd (LSE:HSX), Jet2 and National Express business Mobico Group (LSE:MCG.
FTSE 250-listed Bodycote has rebounded to 688p this year but UBS sees the potential to reach 940p based on its outlook for structurally higher margins.
Hardware and software reseller Computacenter has also enjoyed a stronger year but is kept in the portfolio based on a price target of 2,580p compared with 2,192p today.
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Shares in Hays have disappointed since their inclusion on the list in September 2021, but UBS is keeping faith through a 155p target price.
It notes that the recruitment firm is now valued at the bottom of its through-cycle range, suggesting a 25% peak-to-trough decline in net fees. The company recently announced a 5% increase in its core dividend and a further 2.24p special dividend for a total yield above 9%.
Another high-yielding stock on the list is Mobico, which has materially de-rated due to a less buoyant growth and cost outlook. Reasons for UBS’ “buy” case and target price of 185p include the company’s exposure to the greening of transport and further to go in the traffic recovery for certain markets including the UK.
The bank also highlights the room for consensus upgrades should the company deliver on its five-year margin improvement targets. Mobico trades with a projected 8% yield.
On Jet2, the bank believes the current valuation does not fully factor in the company’s potential traffic, margin and profitability recovery after highlighting a target of 1,580p.
For Trainline , UBS anticipates that ongoing expansion of open access high-speed rail services in the largest European nations will increase the need for price comparisons and lead to market share gains.
The Trainline price target is 315p, while the bank has a figure of 1,530p for specialist insurer Hiscox and 280p for Man Group.
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