The Euro-zone markets rose by approximately 3% during August, reversing the 2% fall of July.
Although the trends are not yet fully formed, it is beginning to look as though the recent strong resurgence in small companies and value stock investments is beginning to change shape. Small companies have underperformed over the past quarter and, particularly over the past month, value too has again started to weaken.
Market conditions are not sufficiently attractive to encourage the interests of foreign investors; this would strongly benefit the large capitalisation growth stock sector (since these are the well-known “brand” stocks). Rather, it would appear that the market is simply marking time, waiting for firmer information on the likely course of economic activity, inflation and the progression of interest rates. Accelerating economic growth and rising levels of inflation and, possibly, higher interest rates, have already been broadly discounted in the markets’ style rewards over the past months (as smaller companies and value stocks rebounded earlier in the year). Now it looks as though the market has paused for confirmation, and that the temporary summer lull has resulted in a modest setback for smaller company value securities.
Now that summer is almost past and refreshed analysts are again focusing on economic and market fundamentals, the market is likely to chart a clearer Style course ahead. Certainly rebounding economic growth would favour cyclical securities (value figures largely in this category) and, selectively, smaller companies. But more stable and favourable market conditions would again attract foreign investment, encourage significant cross-border investment and benefit the larger more liquid, growth-orientated securities.
Robert Schwob is director of Style Investment Research Associates in London.