Euro-zone markets continued to rise, gaining sharply by 7.3% in euro and by 2.8% in US dollars during the month of November.
Despite the weakness of the euro, which must be causing some delay in the European investment programmes of many international investors, larger growth stocks are continuing to outperform against virtually all other of the main style sectors. Considering European investors’ cross-border emphasis on familiar and popular brands and liquid, tradable securities, the rise in this sector is understandable. But, with the euro currently so weak, it is surprising that this effect is so strong.
During the earlier months of the year, very soon after the Euro-zone was formed, euro weakness all but halted inward investment and, by encouraging expectations of improving economic conditions, caused an abrupt turn towards small value companies. Current events could hardly be more different. Foreign investors appear to be no longer so easily deterred by currency risks and, as markets continue to gain and natural concerns over ambitious earnings expectations are pushed further into the future, attention is naturally turning towards the larger bellwether names. It is noticeable that thoughts of a strong economic recovery and a robust profits surge seem no longer to be capable of driving the customary cyclical rebound to value. Although the forecasts are, indeed, impressive, this is now a tired story; and other themes are now more significant.
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.