EUROPE - European companies with a market cap of more than $1bn (€812m) and large pension deficits have underperformed the MSCI Europe index average by more than 25% since late 2009, according to Morgan Stanley.

In a research note, the company’s European equity strategy team argued that a basket of UK and Continental companies with pension deficits exceeding 15% of market cap had underperformed over the timeframe, with high levels of volatility in the stock price evident.

At the time of the survey, Alcatel Lucent reported pension liabilities of more than $3.8bn, nearly 140% of market cap, with Morgan Stanley underweight the French firm.

However, percentage of liabilities compared with market cap did not immediately result in a company being listed as underweight, with the UK’s Thomas Cook Group still equal weight despite reporting liabilities equal to 218% of its market cap of $236m.

The UK retailer Dixons was overweight despite coming third in the UK basket, with liabilities of 45% the company’s market cap.

Only three other companies in the UK basket were ranked overweight - Carillon, Argos and Homebase owner Home Retail Group and discount hotel chain owner Whitbread.

Companies with high liabilities versus market cap in the European basket also included Germany’s Tui, Thyssen Krupp and Lufthansa, although Morgan Stanley was still overweight on two of the three, despite the travel firm and airline reporting liabilities worth 74% and 48% of market cap, respectively.

Despite underperforming by 27% since September of 2009, the research note further struck a positive note, saying that the stocks outperformed during ‘risk-on’ rallies.

“Given that the stocks in our two baskets have underperformed significantly in recent years due to falling core bond yields and weak equity markets,” the note concluded, “logic suggests they could also be material beneficiaries from increasing risk appetite and a reversal in these trends.”

It added: “With forward and trailing valuations of the two baskets at historical lows, bullish investors could use these names to position for a further rally.”