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Europe's small-caps lure fresh cash

Monday, February 25 12:48:42

Shares in Europe's smaller companies are starting to attract fresh investors and should outperform larger firms this year as the continent's relative minnows belatedly fell the impact of central bank stimulus.

Historically, small and mid-sized companies (SMIDs) - with a market capitalisation of $500 million to $5 billion - have outperformed the blue chips, taking off as soon as equity markets rise, because their better growth prospects and exposure to a broader array of business areas offer investors the chance of bigger gains.

This time, though, that outperformance is only just starting, as the unprecedented stimulus from global central banks - which has lifted investor confidence and gradually driven them out of lower-risk assets -- is only gradually filtering down to the smaller firms.

"Investors had all this cash on the side and wanted to plug it straight into the market ... which inevitably meant trading into the big names because that is where the liquidity is," Max King, investment strategist at Investec said.

"(But) investors are now saying: 'I am in the market let us put on some orders in some SMIDs and we can finance that by taking some out of our (blue chip index) ETFs'."

In the final six months of 2012, 5 billion euros flowed into European equities, with the lion's share going to the fewer than 1,000 large listed companies and just 1.2 billion euros invested in the 5,200 small caps, according to Lipper data.

But, with the EuroSTOXX 50 and other blue chip indexes hitting multi-year highs and no longer looking so cheap, that trend has started to turn. Regional numbers from data firm Markit shows money flowing into Exchange Traded Funds invested in British and German small and mid-caps, while those focused on large caps have witnessed outflows so far in 2013.

The divergence in price performance between European large caps and smaller companies has become stark since the start of February, according to a daily correlation chart. The MSCI European small and mid-cap index is up 3 percent this month , while the MSCI European large index has lost 0.2 percent, after the two gauges largely kept pace with each other in the previous seven months. Reuters