Top 20 small-caps for 2016

It's been the most volatile year for global stockmarkets since 2011, with the Federal Reserve's rate cycle and movements in the bond market triggering the latest attack of nerves. Despite this, small-cap shares have easily outperformed their blue-chip cousins for the eleventh year running.

A 'Top 20 Key Calls' list put together by UBS has done much better. It's up 24.9% year-to-date, outperforming the MSCI Small-caps by 2.6%. Since the broker picked its first European small-caps (many would be referred to as mid-caps in the UK) Top 20 in 2006, it's beaten the index every year, and by an accumulated 284%.

This year, so far, most small-cap indices are up 6-18% in Europe. The FTSE 100, in contrast, is down almost 8%. In December, AIM is down a modest 2% and the FTSE 250 under 2% versus the All-Share down over 4% and FTSE 100 almost 5% lower.

"We think it's not just the 'cheap money' cycle, but also due to poor management in large-cap sectors (e.g. banks, utilities) and solid growth in well managed small-caps," writes UBS analyst Bosco Ojeda.

"After five years in a row of low earnings growth, investors are giving up on the European profit cycle. But we think underlying earnings have already turned, and that 2016 and 2017 will see solid earnings growth, driven by acceptable nominal Eurozone GDP, improving margins and operational leverage."

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Ojeda believes costs - both labour and raw materials – will remain fixed while the top-line rises, which could cause a positive profits surprise. European mid-caps trade on a forward price/earnings (PE) ratio of 15.9 times, in line with large-caps, but UBS expects 7% earnings per share (EPS) growth in 2016 compared with 5% for the large-caps.

"A low rate environment and currency are good drivers," adds the analyst.

The new Top 20

UBS has made some changes to its winning portfolio. In goes soft drinks giant Britvic, the company responsible for Tango, Robinsons and R-Whites lemonade. It's joined by Spanish telecoms firm Euskaltel and Dutch oil tank storage provider Vopak.

Italian notepad company Moleskine, German packaging business Krones, and Swiss compressors expert Burckhardt Compression make way.

The new Top 20 is:

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.