• Large Caps Are More Export Oriented – One potential reason for the performance lag has been attributed to the recent increase in the euro and the pound against developed and emerging trading partners. As other currencies depreciate against the euro or pound, products sold by companies in the respective countries become more attractive on the global market compared to products sold by European exporters.
• European exporters, such as software provider SAP AG, German chemicals supplier BASF and French automaker Renault, have all cited the recent currency strength as potentially negative for revenue and earnings.
Small Caps Are More Local to Europe
If data coming out of Europe continues to improve, European small caps offer an interesting contrast to European large caps, and I think they could continue to perform well even during periods of currency strength. Small-cap stocks of a particular region are often more domestically sensitive, deriving more of their revenues from that region than their large-cap compatriots.
How to Focus on European Small Caps?
The WisdomTree Europe SmallCap Dividend Index is designed to focus solely on dividend-paying European small caps. With potential euro strength providing headwind for European exporters, it is important to consider the tools and options available across European equity indexes. European small-cap stocks may be some of the best positioned to benefit from a rebound in Europe’s economy and, at the same time, sidestep the drawbacks of the recent currency strength.
By contrast, if the currency were to reverse course—i.e., the dollar were to start strengthening against the euro—investors should consider these exporters that have underperformed, while at the same time hedging the currency risk.
For current holdings of the WisdomTree Europe SmallCap Dividend Index, please click here.
1Manuela Mesco, “Strong Euro Hits Luxury-Goods Sector,” The Wall Street Journal, 10/28/13.
2Anchalee Worrachate and Alex Webb, “Euro Hedging Jumps as Europe Exporters Bemoan Gains: Currencies,” Bloomberg, 10/24/13.
Important Risks Related to this Article
Investments focusing on certain sectors and/or smaller companies increase their vulnerability to any single economic or regulatory development. This may result in greater share price volatility. Investments focused in Europe are increasing the impact of events and developments associated with the region, which can adversely affect performance. Investments in currency involve additional special risks, such as credit risk and interest rate fluctuations.