Reasons to be positive on European equities

At a recent roundtable event hosted at Gartmore House, Roger Guy, manager of the Gartmore European Selected Opportunities Fund and the Gartmore SICAV Continental European Fund, discussed the reasons supporting continued outperformance this year, including the end of the small cap rally, continued M& A activity and the German recovery.

With small-caps outperforming large caps for six consecutive years, “is the small-cap rally nearing the end of the road?” Roger asks. With the asset class trading at historical highs, investors may be wondering why they shouldn’t be participating in the rally.

Roger points to the valuation discount of large caps making this asset class more likely to outperform. As measured by indicators such as the P/E ratio, large caps look much more attractive compared to small caps, which are trading on a P/E premium of roughly 20%.

An important catalyst to changing the performance of large caps versus small caps will be further merger and acquisition activity which continues to underpin the market, fuelled by strong corporate cash flows. This will “prompt investors to take a closer look at large caps”, comments Roger.

“We maintain a positive outlook for European equities” says Roger, cognisant that the bull market is no longer in its infancy, however, a combination of strong fundamentals and positive liquidity flows should continue to support European equities which remains attractively valued relative to other assets classes.

Investors should also be comforted by data revealing that expansion in European service industries, the biggest part of the economy, unexpectedly accelerated in January after unemployment fell to the lowest on record. Services growth also accelerated in Germany, Italy and France.