More scope for European small-caps, says Williams

Despite outperforming its larger cousins by some 60% since 2001, there is still money to be made out of European smaller companies. That is the view of Nick Williams, manager of the baring Europe Select Trust.

While Williams notes smaller companies are expensive on several measures, he says in terms of earnings per share growth, they still look good value.

The broad expectation from analysts is 17% EPS for smaller companies and 10% from the large-caps, he says. While we think this is slightly over-optimistic for small-caps and under-optimistic for large-caps, assuming nothing major goes wrong in the economy, there is no reason why the two market caps cant perform well.

Indeed, while small-caps are now more expensive than large-caps, Williams says, large-caps themselves are not particularly expensive.

“Large-caps are trading on 12-13 times earnings, while small-caps are on about 16-17 times, both of which are below their historical average price/earnings ratios,” he says.

As a result, while Williams is not forecasting small-caps to continue their recent run of dominance over the larger companies, he sees no reason to sell out of them at this stage.

“In the 1990s, Europe’s smaller companies underperformed owing to a number of structural changes that took place in the equity market,” he says. “By 2001, the reason they outperformed was because they had became too lowly valued by the market. As we now have a more developed equity market, I can see no reason why smaller companies will all of a sudden start trading on a discount to large-caps.”