The pressure of rising interest rates and international political uncertainty will be less favourable for smaller Irish stocks than for bigger Irish groups, according to a new report from Goodbody Stockbrokers.

The broker said the key conclusion from the research for its Irish Small Caps Update report was that the argument for small cap outperformance relative to larger caps may not be as compelling as it was in the past. Small cap valuations "appear less compelling" than larger caps, it said.

Goodbody analyst Gavin Kelleher said investors should choose smaller cap stocks where there is a structural growth story at play. "The Irish smaller caps we identify as structural growth stories that, in our view, offer the best opportunity for outperformance are IAWS, Kingspan, Norkom and Paddy Power."

He identified Fyffes and Greencore as stocks with "special situation" potential depending on the outcome of specific events and said that FDB and Grafton Group were best placed to benefit from the Irish economy.

With interest rates on the rise, Goodbody said investors tended to seek larger more liquid stocks with better defensive characteristics than small cap stocks.

"Certain macroeconomic factors, namely higher interest rate expectations, elevated inflationary concerns and geopolitical uncertainty, may prove more favourable to larger caps and thus hinder smaller cap performance," it said.

"Historically, rising interest rates have tended to be a signal that smaller caps will underperform larger caps. This tends to be the case as during a rising interest rate environment the growth outlook for smaller caps relative to larger caps deteriorates, while at the same time investors' tolerance for risk decreases, and in the process appetite for smaller cap investments declines."

However, the broker pointed out that interest rates were still low by historical standards and said real interest rates were somewhat close to zero "given elevated inflation readings at this time".

On the food group IAWS,Goodbody said there were growth opportunities in Europe and North America and said its agribusiness unit remained the only weak spot in the medium term. "We believe its rating is justified by the visibility of organic growth prospects, while acquisitions are also likely to feature."

On the building products supplier Kingspan, Goodbody said the group provided exposure to the expansion of the construction sector and efficient low-cost manufacturing processes. "Kingspan has performed exceptionally in the face of increased global demand and a dynamic regulatory environment."

Goodbody said software company Norkom, which listed last June on the AIM and IEX markets, had emerged in the past five years as a leading provider of fraud and anti-money laundering products. "Progress over that period is evident not just in an expanding customer base, but also in financial performance, and stands in marked contrast to many similar-sized software companies."

On Paddy Power, the broker said the betting firm was likely to maintain its strong position in the Irish market and growth in its British and online units.

The broker said the fruit group Fyffes was in a better position than for some time to take a leading position acquisition activity in its sector. "After several failed attempts at making a substantial acquisition we believe the next 18 months may well see a large-scale transaction happening".

Goodbody noted the shareholding of property millionaire Liam Carroll in convenience food group Greencore and the group's High Court challenge to its allocation of the EU compensation fund for its exit from the sugar business. Goodbody said Greencore may hold on to its 900-acre landbank, the presumed objective of Mr Carroll's stakebuilding, and sell it gradually rather than selling it off outright.

"Further significant headway in its share price may require a catalyst, such as further developments in relation to the stake build-up by Mr Liam Carroll, a more positive outcome to its High Court case or full-year results that are ahead of market estimates."

Goodbody said the insurer FBD "has become more shareholder focused and is committed to increasing its dividend so that its cover is in line with industry norms".

The broker said the view that Grafton Group offered straightforward exposure to the builders' merchant and DIY markets underestimated the role of management in utilising assets to optimise returns on capital and management's acquisition strategy.