Should be investing in European funds at the moment?
Interestingly in the last month the funds shedding the most money have mostly been European stock market funds. There were a few reasons for this, one of them being the nervousness surrounding the eurozone’s faltering economy.
Ironically it is the economic weakness that many hope will force the ECB into full scale Quantitative Easing (QE) or in other words printing money.. We only have to look at the UK, US & Japan to see what the likely outcome for stocks will be! They will rise in value.
Should investors be considering funds backing large or small cap stocks…and why?
On the whole European stocks are reasonable value, but clearly not as attractive as they once were. But if investors are looking at long term valuations and fundamentals then you would argue that large caps look more attractive.
The stellar outperformance of European small caps over the last 5 years (the average fund is up 85% versus 55% for a typical European ex UK fund) has meant that, as we entered the summer, European large caps were around 20% cheaper than mid and small cap stocks
At some point large caps will outperform small caps and by that I am not just talking about the last 6 months where this pattern has actually emerged. Small caps tend to perform well in the early stages of domestic recoveries particularly when supported by easy monetary policy. Just look what happened in the US & UK. When monetary policies tighten we can expect small caps to lag and large caps to shine. But in Europe we are some way from that!
So investors looking to benefit from ECB QE should look to small caps. But when reality is eventually restored to markets then I’d expect large caps to start to outperform.
3. How important is it to have European exposure and what is the outlook?
European exposure is essentially a bet on QE in Europe. There’s nothing wrong with that but be mindful of the possible downsides. Investing in Europe is going to a bumpy ride. The bumps could come from a number of places such as geopolitical tension in Ukraine, France’s faltering economy or even another banking crisis.
(image by noppasinw on freedigitalphotos.net)