Chart of the Week
Since the beginning of the year, small caps (companies with small market capitalisations) have fallen more sharply than their large-cap counterparts. Since 31 December 2021, the MSCI Europe Small Cap Index has declined 27.8% compared with 12.8% for the MSCI Europe Large Cap Index (dividends reinvested). That being said, European small-cap stocks have outperformed relative to large caps over the past 10 years and continue to do so despite the recent dip.
The stock market performance of small-cap companies has fallen faster than their corporate earnings. As a result, their valuation multiples have returned to historical lows. The trailing price-to-earnings ratio (P/E), which is the measure of a company’s market capitalisation relative to its actual earnings over the last 12 months, has fallen to 11.9 for European small caps from 24.2 at the end of 2019 (according to Bloomberg data for the MSCI Europe Small Cap Index). Over the long term, this ratio sits at around 16, meaning that small-cap stocks are currently trading at a discount to their historical average.
In the same way, the MSCI Europe Large Cap Index currently indicates a trailing P/E of 13.5 compared with 21.1 at the end of 2019. These figures reveal that small-cap stocks, which were previously trading at a premium to large caps, are now trading at a discount.
The opinion expressed above is dated October 21st, 2022 and is subject to change.
See also: https://latribune.lazardfreresgestion.fr/en/signs-of-a-eurozone-economic-downturn-are-accumulating/
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