US small-cap equities remain cheap while their European equivalents have become expensive, according to Henning Gebhardt, head of wealth and asset management at Berenberg bank.
Mr Gebhardt joined Berenberg, a German private bank, at the start of this year, having previously been in charge of around 100 billion euros (£89bn) in his role as chief investment officer for Europe Middle East and Africa (EMEA) at Deutsche Asset Management.
Over the past month, Mr Gebhardt has been increasing his exposure to dollar denominated assets, specifically US small caps, and reducing his exposure to the euro, and top European small cap shares.
He is keen to have more exposure to the dollar as he believes the recent underperformance of the currency has been over done, and he feels the recent strength of the euro has gone too far.
In seeking to increase his clients exposure to dollar denominated assets, Mr Gebhardt has been buying more US small cap shares. He said this is because the smaller companies have underperformed during the recent US equity bull market, so represent the best opportunity now.
In contrast, he is selling European small caps as he believes those are the euro denominated assets that have performed best as European equities have done well, so are the most prudent euro denominated asset to sell.
His comments come in the context of the European Central Bank (ECB) announcing yesterday (26 October) that it intends to reduce its quantitative easing (QE) programme from January 2018.
Reducing the pace of QE, which in practice means the central bank buying fewer bonds in the open market, would likely push bond yields up to attract fresh buyers.
It would also be expected to make the euro currency stronger, as less cash is printed.
However Kathleen Brooks, head of research at City Index, said the immediate market reaction to all the ECB's announcements has been the precise opposite of that, because the market had expected a more “hawkish” stance by reducing the pace of QE further or raising interest rates.
Charlie Diebel, head of rates at Aviva Investors, said the cautious stance expressed by the central bank about tightening monetary policy means sentiment towards “risk assets” such as small caps, will remain positive.
Peter Elston, chief investment officer at Seneca, said he has been reducing his exposure to all equity markets in recent months, as he feels the general trend towards tighter monetary policy in the developed world will be bad for equity returns in the medium term.
Minesh Patel, financial planner at EA Solutions, said he prefers eurozone equities to those of the US, as he feels, while neither is cheap, euro equities are the best value developed market right now.
David.Thorpe@ft.com
