Credit Suisse upgrades UK small caps

Credit Suisse has upgraded European and UK small caps as part of its latest global equity strategy.

The Swiss bank upped continental European small caps to ‘overweight’ from ‘benchmark’, and upgraded UK small caps to ‘benchmark’.

It said British small caps were pricing in PMIs of 45, "and in the long run have outperformed large by 3.6 percentage points per annum".

However, it also acknowledged: "They are essentially only neutrally valued, and being very domestic are much more sensitive to the likely disappointment in UK GDP - owing to both fiscal tightening and the worst hit to real disposable income for over 60 years - and tend to track sterling (and we are mild sterling bears)."

Credit Suisse said European small caps were pricing in PMIs of 45, compared to non-financial cyclicals that were pricing in a PMI of 56, with the most recent flash PMI at 54.

"P/E relatives to large are back to the lowest levels since the global financial crisis, levels from which they tend to outperform. P/B relatives are also close to their Covid trough levels," it noted.

"Earnings revisions are modestly improving, relative to large, and performance has lagged."

Risks remained for European small caps, however: "Small caps tended to outperform as PMIs troughed in the past decade, but when valuation is very cheap they can decouple from PMIs, as they did in 1999 when they started to outperform large cap nearly two years ahead of the recession/trough in PMI.

"Small caps are much domestic and thus outperform when the euro appreciates."

US small caps were unchanged at ‘overweight’.