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