Style trends across the Euro-zone
Large growth Euro-zone stocks continued to post strong relative gains as the market rose further during December, the last month before the formation of the euro.
December's performance extends the trends of the previous three to six months and results in clear relative outperformance of the large growth sector over the past year. In fact, over the past 12 months, all other sectors have underperformed: large value -5.1%; large growth +6.9%; small value -2% ; small growth -4.4%. The approach of the euro, bringing the expectation of improved prospects for economic stability, low inflation and low medium-term interest rates, and the reality of serious cross-border equity diversification has been strongly favourable to the large growth sector. But these influences have not been uniform across the zone; individual country-specific characteristics and more detailed style factors rewarded closer scrutiny.
In some markets, most notably Germany, but also including a few smaller markets, the growth theme is not so clearly or consistently defined. Arguably, in these markets, the apparent 'growth' pattern may not signal a reward to growth potential but might only convey the banal message that fashion, brand recognition and popular stock names have been very important market features as international investors stormed into Europe. And, looking at other style factors, it should not be surprising that balance sheet gearing, and export focus give differing indications across markets, according to the various perspectives on interest rates, near term economic growth and, crucially, the elimination of the competitive devaluation option.
It is understandable that style patterns should be converging across the Euro-zone; the evidence is unmistakable. But for now, and probably for some time yet, it is still worth looking more deeply into the systematic patterns of European share price performance.
Robert Schwob is director of Style Investment Research Associates in London The Euro-zone includes the 11 markets within the initial formation of the euro. The total sample comprises 2,536 traded securities, and returns are the cumulative market-relative total returns (including income) earned from investing in the indicated style portfolios.
The analysis is presented in country adjusted and sector adjusted format (CASA); ie, after having adjusted for industrial sector distortions and country to country distortions. Size is the primary sort, where large is the top 80% by capitalisation and small the bottom 20%. Value is taken to be the top half, by capitalisation, of each size category, sorted by book value per share to share price, and rebalanced every six months. Growth is simplified as the other half within each size category.