Euro-zone markets gained sharply during October, rising by 4.6% in euro and by 3.2% in US dollars. After several months of decline, the relative performance of large growth stocks first turned positive during September. This trend continued and strengthened further during October. While the initial turn towards large growth was quite modest and not accompanied by any particular pattern of returns among smaller companies, the recent month’s style returns reveal the emergence of a clearer pattern. The outperformance of large growth companies has been stronger and has been accompanied by a significant decline in the relative rewards to smaller companies.
The performance swing towards large growth stocks and away from smaller company securities is particularly interesting given the widely publicised positive European economic outlook. Prospects of resurgent economic growth (and a possibility of higher inflation and higher long-term interest rates) tend to favour value equity investments. That was very much the theme during the earlier part of 1999. In this context, the turn towards larger growth stocks and away from smaller value stocks tells either that the economic outlook may have altered or that some other effect(s) may be gaining dominance.
Perhaps the markets are again reflecting the appreciation that Euro-zone market integration, increasing cross border investment and currency stability and a regular export environment tend to favour larger growth companies.
Robert Schwob is director of Style Research 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 2,800 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, 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.