EQUITIES 4 minutes to read

European small-cap rebound – a good sign or not?

Peter Garnry

Head of Equity Strategy

Summary:  When a smaller asset class bucks a trend and unexpectedly outperforms its blue-chip counterparts, should investors hang on for the ride or pocket their profits?


European small caps and emerging market equities were among the worst-performing of all asset classes last year. So far this year the MSCI Europe Small Cap index is up 5.2% compared to only 2.6% for global equities. But is the risk-on sentiment in one of the most risky asset classes a good sign for markets? 

Strong sentiment on European equities is a bit puzzling given the uncertainty over economic growth not only in Europe but globally. Today’s industrial production for November in Germany showed a 4.7% y/y decline, the biggest slide since 2009. Before investors panic one should note that this time series is non-seasonally adjusted, so part of the big decline can be explained from the high base.

Germany’s industrial production in November 2017 was up 5.7% y/y. Nevertheless, the macro print is bad and confirms the weakness in Germany’s external sector driven quite a lot by the weakness in China. In other words, it was already priced in. But combining this information with the weak price action among Chinese equities today, especially in auto and smartphone stocks, the picture looks gloomy.
Enlarge
Source: Bloomberg
We maintain our defensive view on equities. That means no more than 25%–30% weight to them in an asset allocation portfolio and the equity exposure should be in factor tilts such as minimum volatility. On a sectoral level, defensive sectors (consumer staples, healthcare, telecom) should be preferred. In other words, take your gains in European small-caps. Our view is that the market is getting a little bit too optimistic here on the Fed and on a big deal between the US and China.

We could obviously be wrong and China may successfully manage to stage a rebound in the economy on top of striking a deal with the US. In this scenario, and given that the Fed keeps its monetary policy looser  than expected just one month ago, equities could obviously rally further. But remember even during downturns, brief moments of relief rallies do happen. From late March 2008 to mid-May 2008 the global equity market rallied 10.6% on the rescue of Bear Stearns. The rest is history.
Disclaimer

Saxo Capital Markets (Australia) Pty Ltd prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Combined Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)