The preference for large caps is most pronounced within US equities. Some 48% of Europe’s fund buyers prefer large caps, compared to one in three favouring small caps. On a country-basis, smaller companies are more popular than blue chips only in Sweden and Denmark. Last year, this was also the case in Switzerland, Germany and the Netherlands. But these countries have now switched to large caps. The data confirm a cautious trend we already observed last November for a number of countries.
The strong preference for large caps is surprising, considering US large and small caps have generated almost identical returns over the past eight years (see graph below). This is not the case for Europe, where small caps have outperformed their larger peers significantly, albeit with higher volatility. Since February 2009 share prices of smaller European companies have risen by twice as much on average as large companies.
The odds for further share price gains in the coming year are equally low for both large and small caps in the US, according to asset managers. The majority of asset management companies answering the monthly EIE fund manager sentiment survey expect both US small cap and large cap benchmark indices to generate losses of more than 5% in the next 12 months. The estimate is in dollar terms though, so European investors could still make some money provided the euro resumes its downward path versus the dollar.
A year ago fund selectors in all European countries except for the Netherlands, France, Spain, were in favour of small caps. Now, smaller companies are preferred only in Italy, Sweden and, just yet, Denmark. The shift to large caps might therefore well be seen as a sign investors are not yet entirely convinced by the robustness of Europe’s economic recovery, and play it safe by betting on large caps.