European large-cap stock volatility has dropped by 10% from its peak in April this year, although it...
European large-cap stock volatility has dropped by 10% from its peak in April this year, although it is still 10% higher than the lows of late last year, according to Schroder Salomon Smith Barney.
Stefan Hartmann, co-head of quantitative research at the investment bank, said: "There seems to be scope for further reduction in large cap volatility. At current levels, a typical large cap stock is expected to rise and fall by about 40% during the course of the year, which translates into weekly price fluctuations of about 5.5%."
Growth stocks have been experiencing more volatility than value, reaching their peak in March and then dropping in volatility by more than 10%. The price momentum strategies of the market at the time explains the volatility, however, value stocks also displayed similar tendencies to growth, rising in March and subsequently falling, he said. Volatility in the tech, media and telecom sectors remains at all time high levels.
For the fourth consecutive month, European value stocks have outperformed growth.
Hartmann said: "The absolute growth and value returns exhibit a degree of cyclicality and this pattern makes the revival of growth-type stocks in the next quarter more likely. Thus investment strategies solely based on value may run out of steam."
The group, through its research into the various sectors, believes the current environment points to neither growth nor value consistently. It is recommending an investment strategy that selects stocks which are reasonably priced compared with their projected growth in earnings and for which analysts have made significant upward revisions to earnings forecasts.
Within the value half of the market itself Salomons found there was disparate performance. Banks, insurance and speciality financial sectors contributed positively to the growth seen in the value area, while automobiles, construction, energy and chemicals contributed negatively to the overall performance of value stocks.
Within the European value universe the group is favouring energy, basic materials and financials based on their attractiveness in terms of valuation and earnings revisions. Transportation and industrial goods and services are seen as expensive in terms of their valuations
Hartmann said: "Investors taking bets in the tech, media and telecoms sectors have to be highly selective and are taking high risks relative to other sectors. We consequently favour the healthcare and consumer non-cyclicals over technology and telecoms, since they are cheaper in terms of valuation and demonstrate positive price momentum."
Salomons has analysed the relative attractiveness of industries in the value and growth sectors. The research showed that standard valuation measures have not demonstrated predictive power for style or industry timing in Europe.
Hartmann said: "Among the reasons for this is that simple valuation ratios do not necessarily reflect the cheapness of a company relative to its intrinsic value."
The group has found that a better was of defining the rotation from new economy stocks to old economy stocks within Europe is to use the PEG ratio.
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