European small and mid caps-Stock picks Q4 2007-Q1 2008 - Fourlis

Mid cap
European small and mid caps
17 October 2007
abc
European indices: HSBC target prices
Index Country/Type Price 30 Sep 07 Target 31 Dec 07e % potential
CAC 40 France/Large cap 5,717 6200 8.5%
DAX Germany/Large cap 7,862 8500 8.1%
MDAX Germany/Mid cap 10,335 10500 1.6%
FTSE100 UK/Large cap 6,467 7000 8.2%
FTSE 250 UK/Mid cap 11,037 11850 7.4%
Source: JCF, HSBC estimates
Valuation and indices targets
Europe remains our Global Equity Strategy
team’s preferred region and Germany its preferred
country (Overweight) within it. Europe is
currently benefiting from strong global growth
and the relatively cyclical nature of European
markets means they benefit more from this than
most. This is even more true of Germany, which
benefits strongly from Asian demand for capital
goods and which is also seeing the benefits of
structural and corporate reforms in the form of
renewed growth.
We also Overweight the UK and Underweight
France.
One reason we do not expect small/mid caps to
outperform large caps for the first time in many
years is that valuations based on 12-month
forward PEs have become more ambitious, as the
table below indicates. More elevated multiples for
small/mid caps are partly justified, in our view,
because of their higher growth potential, as
reflected by our EPS growth expectations.
Nevertheless, we expect the large-cap indices to
outperform the small/mid-cap ones.
As a result, we more than ever, believe stock
picking to be the way forward for the next quarter
in order to maximise returns. As every time, there
are still particular stocks, which we expect to have
the potential to significantly stand out positively
and show extraordinary performances.
We would hereby focus on non-cyclical stocks,
infrastructure plays, stocks with strong Asia
exposure, construction plays. We would avoid if it
is not a really strong story: real estate, financials,
telco's, media. Focus is also on companies with
healthy balance sheet structures and strong
cash-flows.
As a conclusion, while the valuation gap between
small- and mid-caps and large caps seems partly
justified by the higher earnings growth, we
believe stock picking to be a paramount success
factor especially for small/mid-caps.
European indices: overview
Index Country/Type % Change
3M
% Change
6M
% Change
1Y
Forward
12M PE
Forward
12M P/B
Net div
yield 2008e
Forward EPS-CAGR
12M ROE 2007e-09e
CAC 40 France/large cap -5.6% 1.4% 8.8% 12.3 x 1.9 x 3.4% 15.1% 8.3%
CAC 100 France/mid cap -5.2% -1.0% 15.8% 16.3 x 1.9 x 2.5% 11.5% 13.9%
DAX Germany/large cap -1.8% 11.0% 27.6% 12.7 x 1.8 x 3.1% 14.2% 13.0%
MDAX Germany/mid cap -6.4% 0.0% 19.1% 14.6 x 2.1 x 2.2% 14.1% 16.6%
FTSE100 UK/large cap -5.4% 0.0% 5.7% 12.1 x 2.3 x 3.7% 18.8% 5.1%
FTSE 250 UK/mid cap -7.6% -8.5% 7.2% 13.8 x 2.4 x 2.9% 17.5% 9.3%
Source: JCF consensus
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