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WisdomTree Europe comments on pure offering of smaller companies


Viktor Nossek, Director of Research at WisdomTree in Europe has written a note on small caps, declaring that in 2018 smaller companies offer investors the purest way to play the ongoing recovery in Europe.

“Having already outperformed in 2017 versus large cap peers (the MSCI Europe ex-UK Small Cap returned 20.3 per cent versus the MSCI Europe ex-UK return of 12.3 per cent), it is fair to ask whether returns from European small caps can deliver similar gains again this year,” Nossek says.

“Certainly, they are no longer as cheap on a P/E basis as they were, but the important thing to consider is whether the trend that has powered them since June 2015 – when earnings per share growth turned positive – is coming to a close.

“Our view is that certain parts of the small cap universe – and the ones we are therefore focused on – have actually become cheaper in the last year, with our strategy rebalancing in the middle of 2017 to capture these opportunities. These include opportunities in the industrials, consumer discretionary and financials sectors, whilst the less cyclical telcos and utility names look more challenged.

“As well as providing the potential for stronger growth than larger companies, small caps also offer the purest exposure to the Eurozone itself, as opposed to the large caps which are dominated by multi-nationals and are therefore driven more by macro forces – such as global growth and demand from China – than from the return of growth in Europe.”

Nossek believes that the real question for small caps is whether the recovery – which started in 2013 – can continue.

“The European Central Bank’s commitment to extreme monetary policy has resulted in small caps outperforming large substantially since the start of 2013. As gross domestic product (GDP) steadily increased over the past several quarters and since 2016 has been increasingly driven by consumer and investment spending, the outperformance of small caps accelerated in 2017 as the structural led- expansion fed through into the bottom line growth of small-cap stocks.

“Therefore when reviewing the picture of sector and size earnings growth since 2012, we see that small-cap earnings-per-share (EPS) growth outpaces nearly every sector that we define as cyclical during this secular recovery.” 
Nossek concludes that for believers in both the small-cap value premium and the European growth story generally, now may be the time to take note of the relatively inexpensive multiples for such the sector.

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