There is a particular argument at this juncture for European mid and small caps. The index, dominated by the large cap multinationals, has performed reasonably well year to date, but the mid-small cap area looks neglected. Looking at European mid-cap price/earnings ratios going back to pre-Global Financial Crisis days (September 2007) the current PE is at a 12.5% discount to the average over that time period. By contrast large caps are trading at a 6.6% premium. So, the ‘spread’ between large cap index stocks and the off index mid cap sector is nearly 20%. There is strong potential for a catchup. On the basis of mean reversion this could herald a 20% outperformance for European mid-caps versus large. Perhaps it is no coincidence that with indices closing in on their highs, the NAV of Aubrey European is still 20% adrift of its peak.
Our portfolio is 60% weighted towards the mid-cap area of the market so should benefit. We have a historic precedent for this. After the Global Financial Crisis we outperformed the market by a modest amount in 2009, but 2010 was a bumper year where our strategy outperformed the index by 33%. We had a positive but modest year of underperformance in 2023, and if the same pattern follows, 2024 should be a very good year indeed, both absolute and relative.
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