In Debt and In Demand: Europe's Most-Leveraged Stocks Surge

(Bloomberg) -- Investors shrugged off trade skirmishes and signals of fading monetary stimulus as they rewarded some of Europe’s most leveraged companies, putting the latter on track for their best weekly advance since December 2016.

Stocks with the weakest balance sheets gained 4.5 percent this week, compared to 3.1 percent for their less-indebted counterparts, according to a Bloomberg analysis of Morgan Stanley data.

In Debt and In Demand: Europe's Most-Leveraged Stocks Surge

Since these risky-debt companies were beaten up earlier in the year, they’re beginning to bounce back thanks to the risk-on rally, buoyed by largely positive earnings reports, said Hugh Cuthbert, a European fund manager at Edinburgh-based SVM Asset Management.

“Post the jitters that we saw at the start of February, they are more than likely to be beneficiaries,” he told Bloomberg News in a telephone interview. “The market appetite for risk will always benefit those guys when it’s high.”

Still, it’s a small reprieve after they dropped more than 10 percent in the 25 trading days through last week. Even after the recent advance, shares of weak balance-sheet companies sit 7.7 percent below their January peak. The Morgan Stanley-compiled basket tracks 40 European companies with measures that include net debt to Ebitda and interest coverage ratios.

The good times may be short-lived, however, as the European Central Bank pares stimulus, said Cuthbert.

“Look out, if we are in a tightening cycle,” he said. “A lot of companies have been living off debt and their business model won’t apply to higher interest rates.”

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