As European markets continued to rise during April, the trend towards large-value securities gained further ground.
In general terms, value securities tend to gain from either the anticipation of a strong economic rebound (which directs attention towards cyclical stocks and undervalued turnaround candidates) or from top-of-the-market concerns over growth stocks’ abilities to fulfil their implicit earnings expectations. In trying to forecast ahead, it is important to recognise where we are in the business cycle and to appreciate which feature is likely to be the more dominant cause.
Comparison with the recent style pattern within the UK gives us a few clues. The turn towards value in the UK coincides with a resurgence in smaller company stocks. The pattern across the Euro-zone, in aggregate, is still neutral to negative in the small cap sector.
Investors in UK securities appear to be focusing on economic factors favouring cyclical stocks, including small cap stocks. European investors appear to be predominantly concerned over the ambitious projects for growth stocks and look to be turning to the security of larger companies on less demanding ratings.
Robert Schwob is director of Style Investment Research Associates in London.
Notes: Euro Zone includes the 11 markets within the initial formation of the euro (Germany, France, The Netherlands, Belgium, Luxembourg, Italy, Ireland, Spain, Portugal, Austria, Finland). 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 (using the 10 economic groups within the FTSE Actuaries Industry Classification System) 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.