Bigger Is Better When It Comes to European Stocks, KKR Says

The biggest European companies have the potential for greater equity returns than their smaller peers, according to KKR & Co.’s head of macro research.

Henry McVey’s recommendation of large-cap firms over small and mid-sized companies puts the private equity firm in opposition to views from banks including JPMorgan Chase & Co. and Credit Suisse Group AG. According to McVey, head of global macro and asset allocation at the firm, the prospect of a pickup in earnings at larger companies is greater, given their trailing profits hover near 12-year lows.

“The surge in earnings should push investors toward some of the more large-cap names where earnings have been more depressed in recent years,” McVey said by phone from New York. “By comparison, small- to mid-cap stocks in Europe appear to be over-earning on both an absolute and relative basis in many instances.”

European stocks could see a catch-up rally in 2017, particularly after the French presidential election, McVey said, concurring with the consensus among strategists and fund managers this year. A revival in profit growth, a pickup in inflation and valuations cheaper than U.S. are among reasons for optimism over the region’s equities, with the MSCI Europe Index up more than 5 percent this year.

KKR, which managed $129.6 billion as of Dec. 31, invests in private equity holdings, credit assets, real estate and hedge funds.

In the short term, McVey predicts cyclical companies will continue to outperform the broader market, with an earnings bounce expected from commodity producers and banks. Lenders are also supported by the European Central Bank’s apparent commitment to maintain a steeper yield curve, he said.

In the longer term, he advises exposure to technology companies -- either through share purchases or via private equity -- calling the sector “high-growth, high-reward.”