Lisa Flounders from the Association of Investment Companies reports on today’s Round Table Lunch
The European Smaller Companies sector has recovered dramatically since the Eurozone debt crisis. Between 30 April 2011 and 30 April 2012, the sector suffered hefty losses, down 28% compared to the average investment company, which lost 8% over the same period. However, the European Smaller Companies sector is now the top performing investment company sector over 1 year, up 33%, and over 10 years, up 300%. The sector has also outperformed the wider sector over 3 and 5 years. What is the outlook for the European Smaller Companies sector and for Europe more generally?
The AIC today hosted a press roundtable lunch on the sector with Sam Cosh, Manager of European Assets and George Cooke, Manager of Montanaro European Smaller Companies. Their views have been collated along with those of Jim Campbell, Manager of JPMorgan European Smaller Companies, Ollie Beckett, Manager of TR European Growth Trust and from a broader Europe perspective, Tim Stevenson, Manager of Henderson EuroTrust (in the Europe sector).
Will outperformance continue?
George Cooke, Manager, Montanaro European Smaller Companies, said: “After two consecutive years of strong returns, investors in European SmallCap will no doubt be wondering if there is any upside left for the asset class. Montanaro believe that there is. The forward price earnings ratio (for twelve months) is currently 15.3x, above the long-term average of 13.2x, but well below the peak levels currently being experienced in the US and UK. Furthermore, the premium being paid for SmallCap relative to LargeCap in Europe is below long-term average levels.”
Sam Cosh, Manager, European Assets, said: “Europe is no longer so obviously cheap, but I have to put that statement in to some context. Unlike in the US, company earnings are still at relatively depressed levels. If we return to historic levels, valuations are not as high as they look.”
Jim Campbell, Manager, JPMorgan European Smaller Companies, said: “Nearly every European small cap company that we speak with today is more optimistic. We started buying financials some time ago and we have progressed down the spectrum of cyclicals, from industrials to more recently construction and building materials. In our view there is still a perception gap in European equities. In some cases, investors just need for things to get less bad in order to feel better about the environment. That is what is happening in many of the countries as news flow improves.”
Ollie Beckett, Manager of TR European Growth Trust, said: “Look; let’s get really simplistic. European smaller companies have tended to outperform when global GDP is expanding. Yes, there are concerns about emerging markets. Yes, there are concerns about China. But global GDP is expanding. European GDP is pretty much looking on mid-cycle trend at about 1.8%. Historically, in that scenario with GDP expanding and things like international trade growing, European smaller companies have outperformed and gone up. That is the backdrop we find ourselves in today.”
Themes and opportunities in European small caps
Jim Campbell, Manager, JPMorgan European Smaller Companies, said: “European small caps can continue to outperform in our view, although stock selection remains critical. There are three compelling themes from our perspective in the markets currently. One is playing recovering financials, such as German real estate finance business Aareal Bank and Spanish stock exchange operator Bolsas y Mercados. A second theme is the improving domestic demand in Europe, as expressed in retailers such as Bilia, Byggmax and Clas Ohlson and housebuilder JM in Sweden. We are also finding interesting opportunities in telecom operators and IT services businesses across Europe. A third theme that we find promising is restructuring, such as Danish cable manufacturer NKT and Italian shoe manufacturer Geox.”
The economic backdrop: ‘The foundations of the equity bull market are intact’
George Cooke, Manager, Montanaro European Smaller Companies, said: “The economic backdrop has also improved recently. Since Mario Draghi’s famous speech in the summer of 2012, promising to “do whatever it takes to preserve the Euro”, bond yields in core Europe have narrowed and remain low while those in the periphery have declined significantly. This low interest rate environment looks set to continue, with inflationary risks looking more and more remote. Meanwhile, forward indicators imply that Europe’s economies are expanding again after two years of stagnation. This suggests that we may be at the start of an economic recovery. As such, we believe that the foundations of the equity bull market are intact. If we are right, SmallCap should continue to perform well, as it usually does when markets rise during periods of economic growth.”
In the Europe sector, Tim Stevenson, Manager of Henderson EuroTrust, said: “The US and European economies are improving and returns of 10% are quite possible. I believe that we have seen the worst of the corrections. You have to bear in mind what you are investing into when investing in Europe. Back in 2001, growth rates in Europe were pretty low and the general view was that there would not be any more growth. That is not the point, though: the European markets represent mature economies, but in the long term you can find stable growth, it just won’t be around 20-25%.”
Share price total return on £100
Year on year comparison
|
|
30/04/2013 |
30/04/2012 |
30/04/2011 |
30/04/2010 |
30/04/2009 |
|
30/04/2014 |
30/04/2013 |
30/04/2012 |
30/04/2011 |
30/04/2010 |
|
|
(1 year) |
(1 year) |
(1 year) |
(1 year) |
(1 year) |
|
| Average investment company |
103.03 |
115.33 |
92.05 |
112.36 |
131.26 |
| European Smaller Companies |
133.39 |
125.87 |
71.61 |
124.34 |
132.48 |
KKK
Return over 1, 3, 5 and 10 years
|
30/04/2013 |
30/04/2011 |
30/04/2009 |
30/04/2004 |
|
|
30/04/2014 |
30/04/2014 |
30/04/2014 |
30/04/2014 |
|
|
(1 year) |
(3 years) |
(5 years) |
(10 years) |
|
| Average investment company |
103.03 |
118.18 |
189.88 |
263.68 |
| European Smaller Companies |
133.39 |
129.72 |
228.51 |
400.47 |
| European Assets |
121.03 |
164.36 |
281.95 |
395.12 |
| JPMorgan European Smaller Companies |
142.14 |
123.28 |
226.43 |
502.67 |
| Montanaro European Smaller Companies |
105.05 |
114.47 |
229.64 |
– |
| TR European Growth |
140.43 |
131.07 |
210.73 |
354.02 |
For further information please contact:
Annabel Brodie-Smith Jemma Jackson Lisa Flounders
Communications Director PR Manager PR and Marketing Executive
AIC AIC AIC
020 7282 5580 020 7282 5583 020 7282 5551
07798 624449 07776 204610
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