MOI Global - 17-Year Drought Finally Ending for European Small- and Micro-Caps?
The discussion highlights a compelling investment opportunity in Europe's small and micro-cap stocks, driven by two major dislocations. Firstly, Europe is underrepresented in global commercial indices, with the US being overweight due to valuation and free float reasons. This has led to Europe being undervalued relative to its fundamentals, despite improvements over the past four years. The potential unwinding of the US's hyper-concentration in global indices, particularly in tech, could benefit international markets, especially Europe, due to its undervaluation and attractive fundamentals. Secondly, the size and value premiums, which have been negative since 2007 due to the rise of big tech and healthcare innovations, are expected to revert positively. This reversion could favor European deep value micro-caps, which are inherently riskier and should have higher expected returns. The video emphasizes the significant upside potential in European deep value micro-caps as these premiums turn positive.
Key Points:
- Europe's small and micro-cap stocks are undervalued and underrepresented in global indices.
- US markets are currently overvalued, creating potential for European markets to gain as US concentration unwinds.
- Size and value premiums have been negative since 2007 but are expected to revert positively, benefiting European stocks.
- European deep value micro-caps are poised for significant growth due to their riskier nature and higher expected returns.
- Current US market valuations are at historically high levels, indicating potential for a shift towards undervalued European markets.
Details:
1. 📈 Europe's Micro Cap Opportunity
- Europe's small and micro cap sectors present a compelling investment opportunity, primarily driven by unique market conditions such as undervaluation and economic recovery.
- Investors can expect potential growth and high returns from these sectors due to their agility and niche market focus.
- For instance, some micro cap companies in technology and renewable energy have shown unprecedented growth rates, outperforming larger counterparts.
- The European market's diversity and innovation landscape provide a fertile ground for discovering undervalued companies with strong growth potential.
- Analyzing recent economic trends and market data can help investors identify promising opportunities in these sectors.
2. 💼 Europe's Undervaluation and Global Indices
2.1. Europe's Current Undervaluation in Global Indices
2.2. Potential Benefits from Shifts in Global Indices
3. 🔄 Shifts in Value and Size Premiums
- Since 2007, the size and value premiums in Europe and the US have been negative, coinciding with the rise of big tech and innovations in the healthcare sector.
- Value stocks and small/micro caps have been out of favor, especially in the US and Europe, in contrast to large growth stocks.
- Expected upward mean reversion in size and value premiums could benefit European deep value micro caps significantly.
- Small caps and value stocks are inherently riskier and should have higher expected returns, suggesting future positive premiums.
- Significant upside potential is anticipated in European deep value micro caps as size and value premiums revert upward.
- Historical trends show a decline in the performance of size and value stocks, influenced by technological and healthcare innovations.
- Future expectations indicate a potential reversal of these trends, benefiting sectors currently out of favor.
- Investors can anticipate increased returns by strategically positioning in European deep value micro caps, leveraging anticipated premium shifts.
4. 📊 US Market Valuation Insights
- The current US CAPE ratio is 36, placing it in the expensive market valuation territory, which can imply potential overvaluation and risks for investors.
- Historical CAPE ratio analysis, dating back to 1926, categorizes valuations into cheap, moderate, or expensive, offering insight into market trends over time.
- Today's CAPE levels are comparable to those during the dot-com bubble and exceed those of the Nifty Fifty era of the late 1960s, suggesting heightened caution for current market participants.
- Investors should consider diversifying their portfolios and exploring alternative valuation metrics to balance the risks associated with high CAPE ratios.
- Additional metrics such as the price-to-earnings (P/E) ratio and dividend yield could provide a more comprehensive view of market valuation.