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French small-cap investors keep their cool

French small-cap investors are showing little sign of nerves ahead of this spring’s presidential election, setting a strong pace since the start of the year.

In a week when the possibility that Marine Le Pen, the anti-immigrant National Front leader, could win May’s presidential vote started to worry bond investors, the small-caps market, consisting of 187 members, maintained its sangfroid.

The CAC small index stands 4.3 per cent higher this year, after a rise of 10 per cent in 2016. The blue-chip CAC 40 has risen 0.7 per cent for 2017.

Stephanie Bobtcheff, of fund managers La Financière de l’Echiquier, conceded that the election could become a drag. But she said: “Everybody is aware there is a risk. But people look at the Brexit result and the Italian referendum. Those stocks have been the best performers.”

When it comes to the French election, Raphael Moreau, co-ordinator of European small-cap investment at fund manager Amiral Gestion, said there was “little probability” of victory for Ms Le Pen, who is campaigning on a promise to take France out of the eurozone.

“I think international investors believe in this scenario more than the French,” he added.

Normally in times of political uncertainty, the small-cap market underperforms the main index, as happened in 2007 and 2008 during the global financial crisis and also in 2011 when the eurozone was consumed by sovereign debt worries.

After the Brexit vote in June and the election of Donald Trump as US president in November, the market for small-caps has been resilient.

“We felt Brexit for no more than three minutes on the CAC. It was a non-event,” said Sébastien Faijean, managing director of ID Mid Caps. He also made the point that small-caps recovered from the 2007-08 financial crisis better than their bigger rivals on the CAC 40.

The sector’s recent performance has been driven by a run of good operating results and merger and acquisition activity, said Mr Faijean. The government has also been encouraging investors to back small companies with tax and other reforms.

Small-caps offer investors faster growth and risk diversification. Although more exposed to the French economy than companies in the main CAC 40 market, analysts say they are story specific. The best performer in 2016, for example, was Xilam, a French production company that specialises in animated series and feature films.

Car part makers such as MGI Coutier are doing well in part because of new emissions rules for carmakers that have to look outside for research and development innovation.

Another good performer is JCDecaux, a French company known for its bus stop advertising billboards that is now the UK’s number one outdoor advertiser.

The improving French economic backdrop is helping. But not all listings are domestic focused. One of the best performers is Société Internationale de Plantations d’Hévéas, which runs rubber, cocoa and coffee plantations in Africa. It is up by 102 per cent so far this year.

There were 15 listings last year. Small-caps tend to be family-backed entities, and last year 14 companies were taken private or bought out, including Grand Marnier, the maker of the bitter orange and cognac liqueur. The controlling family shareholders decided to sell to Gruppo Campari.

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