Mr Mustoe is also overweight continental Europe believing that data is now clearly pointing towards a recovery. He says: “Valuations in cyclical areas such as consumer discretionary stocks or housebuilders have moved ahead of predicted growth and investors have to be careful what they are paying for...but we have had a good weighting in Europe for some time. It simply got too undervalued and now there is a more stable backdrop European valuations should normalise relative to other areas.”
Ms Stanley says that European smaller company earnings have seen no recovery. There have been signs of stability, but no cyclical upgrades. “All that has been seen is a recovery from a very over-sold position. If we get an economic recovery in Europe, that should push onwards,” she adds. In the UK, she says, there is a lot of IPO activity and secondary fundraising.
Across the board she is investing in more cyclical areas. She is also finding interesting ideas in consumer durables. Industrial companies, in contrast, have rallied and it is difficult to find value there.
Mr Mustoe has also been taking increasing exposure to Asia and other emerging markets on valuation grounds. He believes recent negative sentiment towards China has knocked prices of Asian smaller companies unfairly, which have continued to lag the broader market. He has taken this as a buying opportunity. He has also been increasing exposure to Latin America.
Ultimately, Ms Stanley believes that smaller companies are still likely to outperform because of the expanding global economy. However, she says that the absolute strength of global smaller companies may moderate. Mr Mustoe believes that investors need to be careful on valuations, but there are still pockets of undervaluation among global smaller companies.
Cherry Reynard is a freelance journalist
