The three-year rally in European small cap stocks has probably peaked, suggests Roger Guy, co-fund manager of the Gartmore European Selected Opportunities Fund.
Data from Eurostoxx indices suggests in the past three years price/earnings (PE) ratios of smaller companies have raced ahead of large caps, to the point the market is paying a 20% premium, Guy says. This essentially means on a PE basis large caps look cheaper at the moment. Factor in expected continued M&A activity and Guy says “I think large caps can significantly outperform small caps.” The risk in taking on greater exposure to large caps obviously lies in small caps maintaining the performance run of the past three years. Further changes in the dollar/euro exchange rate could also...
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