The weakness across European equity markets during May resulted in noticeably disparate, and partially cancelling, value–growth style performance across the Euro-zone. But, in nearly all markets, the smaller capitalisation securities outperformed strongly.
While economic weakness has an understandably negative impact on smaller companies, the implications of market weakness are more complex. Certainly the liquidity in larger company shares attracts the more immediate attention as investors reduce market exposures.
And, as market nervousness also causes an exodus from premium-rated sectors and stocks (which, incidentally, tend also to be larger capitalisation companies) smaller capitalisation stocks appear to rise relative to a falling market. But the effect can be transient, particularly if market weakness is extended or spills over into economic drift.
Nonetheless, if European economic growth rebounds (possibly helped by the falling euro), and investors turn again to favour value securities, the smaller company sector would continue to benefit.
The month’s negative return to the large value aggregate obscures significant market to market differences. Only Germany, Italy and, on some measures, France, recorded a negative reward to value during the month. Elsewhere, value continues to gain against the faltering markets.
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.