Your IndustryJul 23 2015

Impact of recent developments on this type of fund

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by

Recent developments in Europe have affected this fund group in a variety of ways - both positive and negative.

Companies in the small and midcap universe are, on average, more exposed to European domestic economies than large caps.

Consequently, Laurent Inglebert, investment manager at Aberdeen Asset Management, says investors have been drawn into the region as they still feel there is upside once the region begins to deliver sustained gross domestic product growth.

He says: “Stress factors, like Greece or the crisis in Ukraine, hurt potential growth for the zone and may cause higher volatility for small and midcap stocks.

“At Aberdeen, we work to pick names that offer geographic diversification in order to mitigate this sensibility, but there are times when the entire asset class may be affected by a particular event in the short term.”

In January this year, Mario Draghi, the Italian economist, manager and banker who succeeded Jean-Claude Trichet as the president of the European Central Bank in 2011, announced a €1,100bn quantitative easing programme.

Since then, Alain Caffort, co-manager of the Pictet Small Cap Europe fund, says analysts have been upgrading their earnings’ forecasts for the first time in four years.

The current combination of a weak euro, low oil price, and interest rates close to zero should continue to support earnings’ upgrades in Europe, Mr Caffort adds.

Structural reforms initiated during the crisis, especially in southern Europe, have allowed to diminish disparities between northern and southern economies, he adds.

For example, Mr Caffort says current accounts in Spain, and Portugal improved significantly since their 2008 low.

The improvement in fundamentals has created a convergence of GDP growth in Europe, he adds.

Mr Caffort says: “GDP growth for 2016 for Italy, Spain, Portugal, France, Germany, Netherlands, Finland is expected to be between 1 per cent and 2.5 per cent when it was between minus 2 per cent and plus 4 per cent in 2011.

“In this environment. the cyclical bias inherent to smaller companies has been benefiting the asset class.

“By way of illustration, the MSCI Small Cap Europe index is up 24 per cent in 2015 versus 18 per cent for the MSCI Europe index (as of the end of May).”

As a result of this level of performance investors have become more optimistic about the prospects for European equities in recent months, Ollie Beckett, manager of Henderson Horizon Pan European Smaller Companies fund, says.

Flows into European equity funds surged particularly at the start of 2015 following the European Central Bank’s decision in January this year to embark on their own version of quantitative easing, Mr Beckett notes.

He points out this has favoured the European smaller-cap market.

Mr Beckett says: “Smaller European companies tend to be more sensitive to the economic backdrop than their larger peers, which can make them an attractive option during periods of economic recovery or expansion, when investors are generally more bullish.”

Nick Williams, manager of the Baring Europe Select trust, agrees the European Central Bank’s low interest rates policy, and signs of an upswing in economic activity across much of the eurozone, have proved a positive stimulus for European smaller companies.

However Mr Williams says low levels of government spending and continuing uncertainty about the prospects of a Greek exit from the eurozone have held back funds.