The briskly increased interest rates in the recent years have had both direct and indirect impacts on the valuation development of many investments. Interest rate fluctuations have been reflected particularly strongly in small cap companies. Globally small cap refers to listed companies whose market value is approximately 250 million–10 billion euros. In Nasdaq Helsinki, small cap companies typically mean companies with the market value of 150 million–1 billion euros.

– Compared to large companies, many small cap companies have relatively more variable interest rate debt, and this has increased their interest expenses. In addition, inflation has resulted in rising expenses, and large companies have succeeded better than small companies in transferring that increase to customers, says OP portfolio manager Tero Halme.  

For an investor, the small cap companies will be an interesting target, since in OP Asset Management’s view, the interest rates will not increase in the near future.

– A declining interest rate level would support the narrowing down of small cap companies’ valuation difference compared to large companies. The valuation levels of many small cap companies are also still low, although their growth expectations are better than those of large companies. In addition, a larger group of small cap companies is expected to generate earnings growth, whereas among large companies, the growth expectations target just a few companies. The monitoring and recognition of small cap companies are also more limited than those of large companies, which may manifest as undervaluation of the companies, for example, Halme says.

Return development in shares considered to be better than in fixed income investments

OP Asset Management has been putting emphasis on share investments in its allocation, or the breakdown of investments into different asset classes, since the end of last year.   

– We will continue the same emphasis, since in our view, share investments offer a better return development than fixed income investments. However, we will keep the emphasis on the stock market in Finland and in Europe lower than normal and, correspondingly, over-emphasise the stock market in other areas, particularly in the United States, says OP Asset Management’s investment director in charge of interest rates and shares Tommi Kokkarinen.

– Fixed income investments as such will continue to offer a good return potential, although at least for the time being, we consider the return development to be better in stock investments. In fixed income investments, the share of higher-risk corporate bonds in the allocation is smaller than normal and the share of government bonds is higher than normal. We consider the tightened monetary policy to be a greater burden to high-risk corporate bonds than to shares, Kokkarinen adds.

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OP Asset Management Ltd (later “OP Asset Management”) is an investment management firm under OP Financial Group, the operations of which are supervised by the Finnish Financial Supervisory Authority. OP Asset Management provides institutional clients, other entities and wealthy individuals with asset and wealth management services. OP Asset Management can also act as the portfolio manager for OP Funds. This content, produced by OP Asset Management, is considered general market information that does not fulfil the conditions of independent investment research. OP Corporate Bank plc produces independent investment research at OP Financial Group. The presentation is based on public sources and on information which OP Asset Management deems reliable. Nevertheless, this does not imply that the information provided is always complete and accurate. OP Asset Management or those employed by it are not responsible for reports or the financial result of investment decisions based on information obtained from this website, nor for any other loss that may arise from using information contained in this presentation. This presentation shall not constitute investment advice and is not intended as an offer to buy or trade any securities or as encouragement to buy or sell financial instruments of any kind. 

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