Large caps to dominate in 2008
European mid caps outperformed large caps from 2000 to 2006 in part due to exposure to Europe’s economic recovery, according to Gartmore.
While traditional investors explored alternative investment strategies such as commodities and hedge funds, liquid large caps were being sold to fund this alternative trade. De-equitisation, through private equity deals and corporate M&A also supported the mid-cap trade.
However, this began to reverse in the second half of 2007, according to Roger Guy, manager of the Gartmore European Investment Trust and co-manager with Guillaume Rambourg of the Gartmore European Selected Opportunities Fund and the SICAV Continental European Fund. They believe large caps will likely drive performance this year following a flight to quality, precipitated by the recent market dislocation.
Both the European Selected Opportunities Fund and the SICAV Continental European Fund are strategically positioned to reap the benefits of a number of defensive, largely undervalued large cap stocks which typically prove more resilient during unsettling periods. Exposure to international growth, not within the reach of small or mid-caps, compelling valuations (large caps on average trade at a 10% to small caps), higher liquidity and visibility, stronger balance sheets and possible resurgence in M&A activity in 2008 also provide a very supportive backdrop to large caps.
Stocks including steel maker Arcelor Mittal, engineering company Siemens and food producer Nestle feature among the predominately large cap portfolios of Roger and Guillaume, contributing positively to the funds’ performance over the 4th quarter 2007.
Guy said: “European large-cap companies offer both compelling valuation and liquidity while mid-caps have kept their valuation premium. Large caps tend to outperform in volatile conditions by virtue of their greater resilience to market shocks. Exposure to emerging markets, an accommodative US monetary policy and resurgence in M&A activity in 2008 should continue to support this sector.”