Euro-zone equities fell back moderately by 0.2% in euro during March (falling by 0.8% against the rising US dollar). Since the end of last year equities have gained by 4.2% in euro but have fallen by 0.5% against the strengthening US dollar. Although the three-month record still shows considerable strength within premium-priced growth stocks, the most recent month indicates a noticeable change in direction. In parallel with the style reversals that occurred last month in the US, the UK and also in Japan, value appears also to have rebounded broadly across the Euro-zone. And most of the rebound appears to have been in the small companies sector.
Initially this might look to fit with our economic perceptions as a welcome, if somewhat overdue, correction. Finally the markets are reflecting the anticipation of more rapid growth across Europe, the profit cycle looks, to many analysts, as poised to rebound, and inflation is, to some, “just around the corner”. But this is an overly simplistic interpretation. However attractive this interpretation might be, a closer examination is definitely warranted. Within the major individual sectors of the market, further analysis reveals that although the turn to value was quite broad, the largest turns occurred in those sectors that fell most sharply.
This is typical “top of the cycle” behaviour and usually punctuates a sentiment revision and pull-back in selected over-valued securities. But the recent turn shows a bit more as well. Genuine growth factors are also being positively rewarded within individual sectors. After months of neglect, as investors appeared to focus on only premium-ratings and momentum as “growth” characteristics, fundamental analysis now shows a change. Companies with high demonstrated growth and strong growth potential (high historic earnings growth and sales growth and above average returns on equity) are broadly outperforming.
All this is consistent with the market’ s reaction to a recognition of clear over-valuation of particular sectors and specific securities. But it also looks like investors are not abandoning the growth theme at all, but are simply looking a bit more deeply than before.
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.