Why European Small-Caps Could Outperform the U.S. Market: Insights from JP Morgan Asset Management
Introduction
In the world of investing, conventional wisdom often points investors towards North American megacap stocks for growth opportunities. However, Jack Featherby, a key figure at JP Morgan Asset Management, argues that European small-cap companies are poised to continue outperforming their U.S. counterparts. Let’s explore the insights Featherby provided on this compelling investment narrative.
The Surprising Performance of European Small-Caps
While many investors have turned their backs on European markets, the MSCI Europe Ex UK Small Cap Index has achieved an impressive 1,200% growth since 2000. This staggering performance far outpaces most developed market indices, including the widely followed S&P 500.
Featherby noted, “This fantastic performance can come as a shock to many, who mistakenly believe that significant growth can only be accessed through North American megacaps.”
Why European Small-Caps Are Overlooked
Despite their impressive returns, European small-cap stocks account for only 1-2% of global indices and investor portfolios. Featherby attributes this disconnect to common misconceptions that have led many to believe that “the U.S. is the only game in town.”
He highlighted that European small-cap companies have, on average, outpaced both domestic large-caps and U.S. large-caps in growth by 1-2 percentage points annually when measured in dollar terms. “It’s often easier for a small-cap to add a million dollars in revenue than it is for a mega-cap to sustain exceptional growth,” Featherby explained.
Unique Advantages of European Small-Caps
One of the unique factors making European small-caps attractive is their ability to remain small while dominating their markets. Featherby emphasized, “These companies are ‘national champions’ that thrive without needing to scale up dramatically.”
For instance, he pointed out stocks like Fortnox, a Swedish software firm that has surged in value by 300% over the past two decades while still retaining its status as a small-cap. Such high returns are not anomalies but reflect the underlying strength of European small-caps in the long run.
Current Outlook: A Catalyst for Growth
Featherby believes that the 2023 outlook for European small-caps is better than it has been in recent years. One of the key reasons is the current valuation landscape, where European small-caps are trading at a discount of around 20% compared to larger firms.
This discount has emerged due to recent geopolitical uncertainties, fluctuating interest rates, and an energy crisis that pushed investors toward multinational firms. As a result, large-caps have reevaluated upwards, becoming expensive relative to their historic valuations while small-caps remain accessible at lower prices.
Navigating Volatility
Interestingly, Featherby indicates that even if challenges arise, many European small-caps have already priced in potential volatility. “The valuation gives me a bit of comfort. As far as I can tell, there’s no bubble in European small-caps that you need to worry about,” he stated.
Positive Developments Favoring Small-Caps
Several factors have improved the backdrop for European small-caps. The energy crisis is mostly behind investors, and interest rates have stabilized. Additionally, supportive government initiatives may play a critical role in benefiting smaller companies.
Featherby mentioned the German stimulus package, which promises €500 billion towards infrastructure development. “Germany won’t be spending on American companies; it will funnel that cash into domestic firms,” he emphasized. This strategic focus positions national champion small-caps to gain significantly from local projects.
Performance Metrics
Featherby co-manages the JPM European Discovery Trust, which has achieved top-quartile returns in the IT European Smaller Companies sector in 2023. To put this into perspective, it has even outperformed the S&P 500, which is up by 2.7% year to date.
Conclusion
European small-caps offer intriguing opportunities for investors who are willing to look beyond the mainstream narrative. With long-term growth potential, advantageous valuations, and upcoming catalysts, these lesser-known stocks are set to outperform their larger U.S. counterparts. As Featherby affirms, European small-caps really might just be the hidden gems of today’s market.
Focus Keyword: European small-caps
Meta Description: Discover insights from JP Morgan Asset Management on why European small-cap stocks may continue to outperform the U.S. market.
H2 Titles:
- The Surprising Performance of European Small-Caps
- Why European Small-Caps Are Overlooked
- Current Outlook: A Catalyst for Growth
- Positive Developments Favoring Small-Caps
- Performance Metrics
- Conclusion
