2018 SME CONFERENCE Catch-up opportunity After several years of relatively weak performance, the Oslo small-cap index has recently shown some resilience while its Swedish counterpart has been on the soft side versus large caps. In this report we look at small- and mid-cap valuations in relation to their history and tradable liquidity, as well as the performance and positioning of the stocks and their expected returns. We highlight eight top picks for a Nordic portfolio.
Catch-up in progress. Despite improving returns short-term, on an aggregated basis Norwegian small caps have continued to lag behind large caps over the past few years. They have also provided returns significantly below Swedish small caps for the past three years. A negative or flattish return in Swedish small and mid caps in recent years comes after a solid outperformance in the preceding periods. History indicates an opportunity for significant outperformance of small caps versus large caps as the cyclical upturn matures. Based on previous cycles and the assumption of continued positive market sentiment, the implied potential for improving relative yields for Norwegian small caps has not been realised since 2013.
Caution on metrics. DNB Markets’ coverage universe of small and mid caps spans 116 equities listed in Oslo, Stockholm, Helsinki, Copenhagen and London. A total of 351 companies are included in the OSESX (Oslo small cap), the OMXSSCP (Stockholm small cap) and the OMXSMCP (Stockholm mid cap) indices. With daily liquidity for almost 200 of these stocks below NOK1m/SEK1m, in our view investors should use valuation metrics with some caution. When adjusted for one-off transactions, we also believe increases in a stock’s liquidity could be used to identify interesting opportunities and potential for multiples expansion. Top picks. Our eight top picks in the Nordic space are: Actic, Ahlsell, Axactor, Hexagon Composites, Nordic Semiconductor, NRC Group, Oncopeptides and Scandic Hotels.