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JP Morgan picks likely small-cap winners in UK economic upturn

JP Morgan recently upgraded its forecast for UK GDP growth. If the UK economy is on the upturn then it won't necessarily be the big caps that benefit most; the heavyweight broker has identified 10 small and mid-caps that it thinks will do well out of an upturn in economic activity in the UK.

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Recent data suggests the UK economic bandwagon might not be the three-wheel jalopy pessimists suspected it might be, which is good news for many British companies.

The FTSE 100 consists, in large part, of international companies, many of which do not have a significant exposure to the UK economy, so if UK plc is set for an upturn, it will be the small and mid-cap stocks that are likely to most feel the benefit.

Bearing this in mind, heavyweight broker JP Morgan has identified ten small and mid-cap plays that derive most of their earnings from the UK and that should, therefore, get a lift from increased economic activity here in Blighty.

The ten small and mid-cap stocks identified by JP Morgan, and the reasons for their selection, are:

1. Bellway (LON:BWY): More signs of life in the UK housing market.
2. Big Yellow Group (LON:BYG): Occupancy of self-storage units may rise.
3. Cineworld (LON:CINE): Higher ticket prices and retail spend per person.
4. Debenhams (LON:DEB): Consumer discretionary expenditure to drive growth.
5. Great Portland Estates (LON:GPO): Higher demand for rental space in London.
6. Greene King (LON:GNK): Higher footfall and spend per head.
7. Howden Joinery (LON:HWDN): Rising demand for kitchen installations.
8. Provident Financial (LON:PFG): Growth in loan book and lower impairments.
9. Restaurant Group (LON:RTN): Acceleration in the trend towards eating out.
10. Rightmove (LON:RMV): Uplift in housing transactions.

Four of the companies in that list have their fortunes tied to the housing sector (Bellway, Big Yellow, Howden Joinery and Rightmove), whereas only one is a retailer, suggesting, once again, that Britain is a nation of house owners, not a nation of shopkeepers.

Having said that, Great Portland, with its mixture of office space and retail units in London’s West End, is also clearly dependent on an upturn in the fortunes of retailers.

Three companies are what might be termed the “good night out” category: Cineworld, Greene King and Restaurant Group.

The singleton choice is Provident Financial, the small loans specialist. The FTSE 250 company saw its shares hit a 52-week high of £16.83 in the early part of May, but are down to around £14.52 now, after a disappointing first quarter trading update.

JP Morgan has an ‘overweight’ recommendation for all 10, except Debenhams, for which it has a neutral rating.

Quick facts: Bellway PLC

Price: 2935 GBX

LSE:BWY
Market: LSE
Market Cap: £3.62 billion
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