The Euro-zone markets gained sharply (by 3.6%) during June but fell back by nearly the same amount (–2.8%) during July. Against this background of nervousness, uncertainty and disparate performance among major Euro-zone markets, it would normally be expected that large value would outperform. Typically, market jitters cause large premium-rated stocks to suffer as attitudes become less exuberant. But this seems not to be occurring.
Rather, it looks as though very little may be happening in the large capitalisation sector, but that smaller companies are enjoying a period of persistent outperformance. Certainly the recent return of optimism regarding European economic growth is having a positive effect on the long-neglected smaller company sector, but it would be wrong to conclude that nothing is happening across the larger capitalisation stocks.
It is significant that larger value companies are not outperforming. Investors appear reluctant to mark down premium-rated growth stocks much further. In fact, there is early evidence that investor interest is now returning to growth stocks, but selectively, and according to different, more forward looking, growth criteria than previously. If the growth theme rebounds, as it has already done in the US and the UK, it is unlikely to be simply premium-rated securities in the forefront. The market looks to be searching more aggressively for genuine indications of future growth potential.
Robert Schwob is director of Style Investment Research Associates in London.