European small caps to bounce back

Smaller company share prices have made an inauspicious start to the year, but according to Citywire A-rated Crispin Longden, manager of the European Assets Trust and F&C European SmallCap Fund, such has been the speed and magnitude of price falls since July 2007, that at least a short-term bounce back looks increasingly likely.

"The first few months of the year are generally positive for the asset class and there are tangible indicators to suggest a rebound," commented Longden. "Sentiment among investors has deteriorated markedly in the past few weeks and yet business confidence remains relatively robust."

Longden explained that now that hedge funds and private equity concerns are largely absent from the mergers and acquisitions circuit, companies themselves are stepping in with takeover bids to shore up their franchises for tougher times and, in the process, supporting share prices across industry sectors.

"Broking analysts may still be too optimistic in their earnings assumptions for 2008 but share prices of some of our favoured names are now at levels which offer value even using the 'stress test' of applying a low PE multiple to peak cycle earnings," he added.

Longden focuses particularly on stocks which have demonstrated their ability to generate consistent returns to shareholders over many years. "One of our most successful bets is Swiss company Logitech. It has now delivered over 30 quarters of double digit profits growth from its range of affordable, innovative media gadgets. This is a characteristic of efficiently-run, growth-oriented companies which should continue to outperform value plays in the current economic climate of falling short term interest rates but rising long-term bond yields," Longden concluded.