Will Europe’s Smaller Companies Deliver Big Returns

European equities have been largely unloved by investors for some time, having lagged their global peers over the past decade: the MSCI Europe ex UK Index has grown by circa 6% pa whilst the MSCI World Index is up circa 11% pa. European smaller companies have fared markedly better than their large cap counterparts however, outperforming the world in 2017 and growing at an annualized rate of over 10% during the last 10 years, as measured by the MSCI Europe ex UK Small Cap Index.1

Indeed, over the long term, European Smaller Companies has been one of the strongest performing sectors across the globe, as can be seen from the chart below2:

Whilst the closing months of 2019 were marked by increasing volatility driven by a slowdown in global growth, Sino-American trade wars and Brexit. All this paled into insignificance in the first quarter of 2020 when cases of COVID-19 infections were confirmed outside of China, shutting down the global economy as the virus swept from China, through Europe and on to the US.

In early March 2020, global stocks saw a downturn of at least 25%, and 30% in most G20 nations, as the pandemic inflicted rising human costs worldwide and the necessary monetary and fiscal protection measures severely impacted economic activity. Global and Euro-area growth are projected at -4.4% and -8.3% respectively in 20203, signalling the worst recession since the Great Depression. The initially savage drops in stock markets were promptly followed by a dramatic bounce from mid-March onwards, Europe included, and by the end of October 2020, a sterling investor had seen a 12-month gain on an investment in European smaller companies of circa 10%, aided by a weak pound.4

Euro small cap – the drivers of positivity

The region’s smaller companies continue to be one of the more attractive investment sectors within world markets, for a host of reasons:

  • it represents a unique blend of industries and companies which are less prominent in other regions
  • European smaller companies have traded at a discount to their peers elsewhere over recent years, and so companies which would potentially command premium ratings in, say, the US are considerably more attractively priced in Europe
  • it is an imperfect market which is ideally suited to active management, especially given the relative paucity of research available on its constituent companies: there are circa 2,500 quoted European stocks with a market capitalization of between £100m and £5bn, compared to circa 400 with a market cap of over £5bn
  • it offers exposure to high growth niches such as fintech, computer gaming, e-commerce and green energy (the EU is leading the world with its green agenda)
  • the policy environment is as constructive for equities as it has been for some time – the considerable support injected into European economies by governments and central bankers – furlough schemes, guaranteed loans, interest rate suppression and the like – have had a positive overall effect and appear to have staved off the worst (although, for companies without a viable long-term business model, this support merely delays the inevitable)
  • historically, European smaller company outperformance has been highly correlated to positive Purchasing Managers’ Index (PMI) data – given this correlation, there is an expectation that the European small cap sector, and indeed value, will outperform as the economy strengthens and PMI data improves further
  • Europe as a region is highly geared to global trade and so should be amongst the first regions to benefit from a post-COVID recovery
  • at circa 1.5x, the price to book ratio (a key indicator of value) of European small cap stocks is currently some 15% below its historic average of circa 1.8x
  • 2021 forecast earnings per share growth for European small cap stocks is amongst the highest of any region (see table below).5

TR European Growth in 2020

Despite the unprecedented market turbulence, TR European Growth Trust (TRG) – managed by Ollie Beckett since 2011 – has performed impressively, achieving total return out-performance of 9% in its net asset value (NAV) relative to the benchmark over the last 12 months.6 Ollie attributes this achievement to a number of factors:

 

  • an undiluted focus on the fundamental worth of a business, at a time when favoring short-term momentum would have proved very costly
  • the diversity in portfolio holdings, with a mix of early-stage growth businesses, sensibly priced structural growth stocks, mis-priced value names and self-help turnaround stories: the trust currently holds circa 130 stocks
  • good stock selection, primarily managing to buy online business models that have benefited from a COVID-19 tailwind at a reasonable price
  • a willingness to go down the market cap scale – early entry into these growth stocks has enabled acquisitions at low valuations
  • it is not a value portfolio, valuation having been out of vogue as a stock market discipline for the last decade; despite that, the trust remains acutely valuation aware – maintaining valuation discipline throughout the market dislocation, it has taken the opportunity to buy some great businesses at good prices and some good businesses at great prices.

At a geographical level, the trust remains overweight in Germany (21.6%) and the Netherlands (8.0%), and has built a reasonably large overweight position in France (13.6%). It remains underweight in Spain and Austria, where it has proved difficult to find attractively valued opportunities for a few years. At a sector level, the trust remains overweight in technology, consumer discretionary and industrials.

The key driver of outperformance, however, has been the trust’s unalloyed commitment to bottom-up stock-picking: whilst risky concentrations are always avoided, index weightings play little to no part in asset allocation and Ollie is comfortable running the portfolio with substantial divergence from the benchmark.

TRG has consistently generated its own investment ideas rather than relying on external analysts, which is fortunate given the declining availability and quality of external analysis exacerbated by MiFID II. To that end, the TRG portfolio management team – Ollie, Rory Stokes and Julia Scheufler – spends hundreds of hours meeting and analysing medium and small-sized companies across western Europe – circa 600 meetings in the course of a typical year. It’s their belief that only through this level of immersive interaction and investigative rigour can the potential for significant outperformance be realised.

Depending on dividends

Despite not targeting income, one of the attractive aspects of the trust relative to its peers is its dividend payment solidity: over the last five years, average annual dividend growth of 25.7% is the highest in its sector.7 A final dividend of 14.20p to shareholders was agreed at the 2020 annual general meeting and, together with the interim dividend of 7.80p, brings the total dividend for the year to 22.00p, in line with last year – no small feat given Q2’s widespread corporate dividend-cutting and suspensions.

Since the end of October, the trust’s outperformance has accelerated post the positive news regarding the Pfizer vaccine, coupled with renewed investor attention on value. Looking beyond COVID-19, some voices are contending that we will see new lows in the market; Ollie doesn’t agree, being of the view that, whilst the market may again show some volatility later in the year as we emerge from the virus lockdown, confidence in an economic recovery is tested, and – as we’ve said – sentiment will undoubtedly be bolstered by the rollout of the Pfizer and AstraZeneca vaccines.

European smaller companies continue to be an attractive area. As already stated, it’s an imperfect market and the TRG team is confident that the hard work it puts into understanding the companies in its universe will enable it to continue to take advantage of further opportunities and mispricing, thereby identifying ongoing sound prospects for the deployment of shareholder capital.

1EUR, 10 years to 30.11.20

2Source: Janus Henderson, DataStream, in GBP, as at 31.10.20. Indices used: Euromoney Smaller European Companies ex UK, FTSE 100, FTSE 250, S&P 500, MSCI Emerging Markets, Datastream UK 10-Year Gilt, MSCI Europe ex UK

3Source: International Monetary Fund, World Economic Outlook, October 2020

4Source: MSCI Europe ex UK Small Cap Index, year to 31.10.20

5Source: TR European Growth Trust PLC, Annual Report 2020

6Source: Morningstar, relative to EMIX Smaller European Companies ex UK Index, as at 31.10.20

7Source: Association of Investment Companies/Morningstar, as at 18.11.20

8Source: Morningstar, as at 31.10.20.

Glossary

Volatility – The rate and extent at which the price of a portfolio, security or index, moves up and down. If the price swings up and down with large movements, it has high volatility. If the price moves more slowly and to a lesser extent, it has lower volatility. It is used as a measure of the riskiness of an investment

Market capitalization – The total market value of a company’s issued shares. It is calculated by multiplying the number of shares in issue by the current price of the shares. The figure is used to determine a company’s size, and is often abbreviated to ‘market cap’.

Price-to-book (P/B) ratio – A financial ratio that is calculated by dividing a company’s market value (share price) by the book value of its equity (value of the company’s assets on its balance sheet). A P/B value <1 can indicate a potentially undervalued company or a declining business. The higher the P/B ratio, the higher the premium the market is willing to pay for the company above the book (balance sheet) value of its assets.

Gearing – A measure of a company’s leverage that shows how far its operations are funded by lenders versus shareholders. It is a measure of the debt level of a company. Within investment trusts it refers to how much money the trust borrows for investment purposes.

Monetary (protection) policy – The policies of a central bank, aimed at influencing the level of inflation and growth in an economy. It includes controlling interest rates and the supply of money. Monetary stimulus refers to a central bank increasing the supply of money and lowering borrowing costs. Monetary tightening refers to central bank activity aimed at curbing inflation and slowing down growth in the economy by raising interest rates and reducing the supply of money. See also fiscal policy.

Fiscal (protection) policy – Government policy relating to setting tax rates and spending levels. It is separate from monetary policy, which is typically set by a central bank. Fiscal austerity refers to raising taxes and/or cutting spending in an attempt to reduce government debt. Fiscal expansion (or ‘stimulus’) refers to an increase in government spending and/or a reduction in taxes.

References made to individual securities should not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase the security. Janus Henderson Investors, one of its affiliated advisor, or its employees, may have a position mentioned in the securities mentioned in the report.

For promotional purposes. Not for onward distribution.

Before investing in an investment trust referred to in this document, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser. [Past performance is not a guide to future performance]. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

[Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change]. Nothing in this document is intended to or should be construed as advice.  This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment. [We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.]

Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Capital International Limited (reg no. 3594615), Henderson Global Investors  Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), Henderson Equity Partners Limited (reg. no.2606646), (each registered in England and  Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial  Conduct Authority) and Henderson Management S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier).

[Janus Henderson, Janus, Henderson, Perkins, Intech, VelocityShares, Knowledge. Shared and Knowledge Labs] are trademarks of Janus Henderson Group plc or one of its subsidiaries. © Janus Henderson Group plc.

Source: Will Europe’s smaller companies deliver big returns? – CityAM : CityAM

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New Europe Travel Bans: Covid Red Lists, Here’s What To Know

As Covid creeps up again across Europe, many countries are reimposing travel restrictions on neighbours.

As this happens, the map of Europe is being color-coded red, green and yellow.

Travelers on high-risk red lists are being shut out, either with total travel bans or quarantines. Those on green lists meantime have a green light to travel.

But n a sign of the times, Norway for example no longer ranks any zones as green in Europe or beyond.

Hungary First In EU To Reinstate Blanket Ban Foreigners

Police control EU travelers at Hungarian borders as Hungary closes to foreigners Covid
Police officers control car drivers at the Hungarian-Slovakian border on September 3, after Hungary … [+] AFP via Getty Images

The most spectacular and controversial return to shutdown EU borders came with Hungary’s decision to add all countries to its red list from September 1.

Barely two months after reopening to Schengen travelers, it’s defying the bloc’s recommendations on internal borders and travel freedoms. The measures will stay in place at least until October 1. Recommended For You

Green Lists Shrinking, Red Growing

Links to government restrictions are included in the country headings. See useful details on the Reopen Europe website too.

PROMOTED

BELGIUM

Man at Brussels airport in Belgium with mask as Covid Travel Bans return to Europe
“Travelling within Europe: pay attention to the colour code of your destination,” urges the Belgium … [+] AFP via Getty Images

Belgium in early August added many parts of Romania, France and Spain to its red list. That means a total ban on non-essential travel to those places. Travelers returning must both quarantine and test on return.

  • The current red list includes Andorra, Croatia, Denmark, Hungary, Romania, many parts of Spain and France, and Scotland’s Aberdeen.

CYPRUS

  • Countries are divided in 3 categories: A (no restrictions), B (some), and C (no entry other than for citizens/residents).
  • Banned C list countries include France, Luxembourg, Romania, Serbia and Montenegro.
  • Germany, Norway, Hungary and Slovenia are among the A listers.
  • B countries must show a Covid-19 test result taken within 72 hours. They include Austria, Belgium, Denmark, Portugal, Sweden, Switzerland and the U.K.

CZECH REPUBLIC

Czech Republics Green Red covid risk zones and destinations for travel in Europe
The same quarantine rule applies to Czech citizens returning from the red countries Czech Republic Ministry of Health

DENMARK

Denmarks yellow blue green Covid map Europe for travel bans
The Danish government’s health map of the EU, Schengen zone and the U.K. indicates “open” and … [+] Danish Police/Statens Serum Institut

FINLAND

Finland covid travel restrictions green red yellow lists for Europeans and others
Residents from mixed red-green countries face no travel restrictions either to Finland. They include … [+] Finnish Border Guard

Finland too has a red, green, yellow system, updated on August 24.

  • Italy, Hungary and Slovenia are currently among the handful of welcome green countries.
  • Most other EU/Schengen countries and the U.K. fall on the yellow list, allowing onlyessential travelers including workers to visit.
  • Family members, parents, siblings, spouses and couples are among the exceptions.

HUNGARY

A boy on scooter looks on as Hungarian police officers control drivers at border Europe
Exemptions from Hungary’s wide-reaching new travel restrictions include freight transport, … [+] AFP via Getty Images
  • Almost all foreign tourists are now on Hungary’s Red List for a month.
  • The government advises its citizens against travel to some 40 red list countries in Europe and overseas.
  • Those who do must self-quarantine for 14 days, or until they can show two negative tests taken with a two day interval.
  • Exemptions include transit passengers and Visgrad Group travelers (Poland, Czechia, Slovakia) with a negative Covid test taken within five days.

IRELAND

Men in masks by holiday advertisement Ireland no non-essential overseas travel Europe
Ireland has a Green List for travel, and a not green list, which it doesn’t officially call a red … [+] PA Images via Getty Images
  • The Green List just shrunk, even for Europeans. As of August 31, “normal precautions” and a green “security status rating” says the government, applies only to Estonia, Finland, Greece, Greenland, Hungary, Italy, Latvia, Lithuania, Norway and Slovakia.
  • With the EU Covid seesaw, this could change at any time. The list is constantly under review.

LATVIA

Latvias red list was super-sized in past days.

  • The list from the Latvian Centre for Disease Prevention and Controlshows red and yellow countries, with infections above the required threshold of 25 cases per 100,000.
  • Some 25 European red list countries include Austria, Belgium, France, Greece, Ireland, Portugal, Spain, Sweden and Switzerland. They are classified as a “Serious threat to public health”.
  • Even those who transit these countries must quarantine on return. The state “discourages” travel to those places.

LITHUANIA

Map of red list countries in Europe EU and world travel bans restrictions in Lithuania
A map of “red painted” countries shows on Lithuania’s KORONA STOP government website shows how the … [+] Lithuanian Government
  • The red list of countries grew on August 31, with travelers from Belarus, Italy, Slovenia and Slovakia now also facing mandatory self-isolation on arrival.
  • Norway, Lithuania, Estonia, Finland, Hungary and Latvia are the only EU/Schengen countries on the green list, due to less than 16 cases/100,000 in the last 14 days. face no quarantine requirement.

NETHERLANDS

Travelers with face masks at the Schiphol airport in the Netherlands Europe during Covid
Given red and green lists are based on relative Covid risk levels, countries rated Yellow for travel … [+] SOPA Images/LightRocket via Getty Images

The Dutch government zones countries for Covid as Yellow (OK) and Orange (not ok, quarantine required). “Foreign travellers from countries where the health risks are similar to or lower than in the Netherlands can enter for tourism,” it says.

  • Andorra, Bulgaria, Croatia, Malta, Romania , Spain, Monaco and various departments in France are on the orange list.

NORWAY

Norwegian Health map of EU Europe Covid red green yellow countries
The Norwegian Institute Of Public Health map shows there are no longer any green, totally safe Covid … [+] Norwegian Institute Of Public Health

Norway has a red, green, yellow Covid map. Currently no country is marked as a restriction-free green zone. Many more Europeans were added to the “high transmission” risk red list on August 29.

  • Red List: 10-day quarantine for travelers from France, Switzerland and Sweden since August 11. Now applies to most EU/Schengen arrivals–from Portugal to Poland–and to the U.K. The few exceptions include Hungary, Slovakia, Italy and Norway.
  • Yellow list countries are exempt from quarantine, but the Norwegian Institute of Public Health still classifies them as “increased risk”.
  • The government currently advises against all overseas travel.
Norwegian people sit by lake in Oslo amid Covid EU  travel bans no travel in Europe
With Norway adding nearly all EU and Schengen countries to its red list – some 20 in all – … [+] AFP via Getty Images

SLOVENIA

Slovenia too has a color-coded system with green, yellow and red lists.

  • Those in the green category like Canada and Australia can enter restriction-free.
  • Red list countries with more than 40 Covid cases per 100,000 must quarantine for 14 days.
  • The yellow list applies mostly to EU/Schengen citizens, who face no quarantine–provided they are not coming from a red destination.
Temperature control for Covid in Slovenia amid new Europe virus wave and travel bans
Slovenia’s updated red list includes several Europeans – Albania, Andorra, Belgium, Croatia, … [+] AFP via Getty Images

U.K.

The U.K. red list comes in the form of quarantine for a growing number of countries. The Czech Republic and Switzerland are among the latest Europeans to join others like France, Croatia and Austria who no longer enjoy a quarantine-free travel corridor with England.

Showing the nation’s quarantine policy disarray, Scotlandand Wales are imposing quarantine on Greece and Portugal–both of which remain on England and Ireland’s corridor lists.

Further Reading: More Covid Tests, No Travel Bans: EU Urges Europe To Make Common Rules

empty tables on Greek island amid Covid resurgence and new wave of travel bans EU Europe
The empty tables on Meis Island in Greece say it all about the new wave of Covid travel bans and … [+] Anadolu Agency via Getty Images

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Tamara Thiessen

Tamara Thiessen

I have three decades of experience as a journalist, foreign correspondent and travel writer-photographer. Working for print, digital and radio outlets on four continents, I am also a veteran hotel industry reporter and author of travel guides and cultural histories to Australia, France, Italy, Spain, Switzerland and Borneo. Very often on the road between my Paris and Australian bases, I write for Forbes with a globetrotters perspective and newsy edge on travel, culture, hotels, art and architecture. My passion is capturing the distinctive people, places and events I encounter along the way, both in words and pictures. I hold a degree in Professional Writing from Canberra University, an MA in European Journalism from the Université Robert Schuman Strasbourg, and am a member of the Society of American Travel Writers. A love for my wild home-island of Tasmania fuels my commitment to sustainable travel and conservation.

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