Market attractiveness Equities: European small caps on the buy list
Luxembourg, 18 December 2020 – The second (or third) wave of the pandemic may keep weighing on equity markets worldwide in the coming quarter. The looming prospect of an end to the pandemic due to the availability of vaccines, however, will lead to long-term upward movement. “The global economy is briskly starting a new economic cycle”, said Carsten Gerlinger, Vice President of Moventum AM. Equity investors will see promising opportunities in cyclical stocks, while emerging markets are also becoming more attractive.
In 2020, the US economy performed better than expected, since it did not contract quite as much as feared at the beginning of the pandemic. Growth prospects are now looking very good for 2021, while it is anticipated that other parts of the Western world will do even better. Nevertheless, in the long term, the US is set to remain in a better economic position than other economic regions, above all better than Europe. “Being much more flexible, the US economy will continue to be more characterised by market economy and undisputed technology leadership”, Gerlinger explained. The tech-heavy index structure, in particular, accounts for the higher valuation of the US stock market.
Even though above-average profit growth is expected for companies in the cyclical sectors due to their low baseline, the technology sector and the entire growth segment overall will also continue to offer high growth rates. “While the technology sector is highly valued, it also offers sustainable and relatively high earnings growth”, Gerlinger said. The continued increase in networking and automation will remain a key growth driver. “Despite the solid November performance, cyclical companies, particularly small caps, still show catch-up potential”, Gerlinger added.
Europe’s economic outlook for the coming year is good as well. Industry and stock indices in Europe find themselves in a cyclical position. “These cyclical companies and, in all likelihood, their share prices will benefit disproportionately from the economic recovery”, said Gerlinger. “We are holding a positive view of European small caps, especially in Germany, in this phase of economic recovery.” Overall, the weighting of European equities is being increased in portfolios in line with a reduction of the significant overweighting of US equities. “Nevertheless, we are maintaining our fundamental overweight in the US, reinforcing the small and mid-caps sectors, which should benefit significantly from the US economic recovery”, Gerlinger noted.
The emerging markets are also becoming more interesting. “Due to its abundance of raw materials, South America should benefit comparatively strongly from an economic recovery, but we are viewing high political risk on the continent”, analysed Gerlinger. “Therefore, our focus in the emerging markets will very clearly remain in the direction of Asia.” Benefitting from the weakening of the US dollar, the emerging markets are comparatively more attractively valued overall. They also benefit disproportionately from an economic recovery. “As we consider the emerging markets to be attractive, we are now slightly overweighting the segment”, Gerlinger concluded.
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