Monday, September 15, 2014

Time for European small caps to shine?

In addition to waiting for the FOMC and the results of the Scottish Referendum, we will see the first results of the ECB's TLTRO this week. As a reminder, the purpose of the TLTRO program is intended to stimulate lending to eurozone households and non-financials:
In pursuing its price stability mandate, the Governing Council of the ECB has today announced measures to enhance the functioning of the monetary policy transmission mechanism by supporting lending to the real economy. In particular, the Governing Council has decided:

1. To conduct a series of targeted longer-term refinancing operations (TLTROs) aimed at improving bank lending to the euro area non-financial private sector, excluding loans to households for house purchase, over a window of two years.

2. To intensify preparatory work related to outright purchases of asset-backed securities (ABS).
This program should be beneficial to eurozone SME. In that case, why are European small caps underperforming? As the chart below shows, European small caps topped out against large caps (black line) in March and they have been rolling over ever since. This pattern of small cap underperformance is not unique to Europe, as US small caps have exhibited a similar pattern, albeit with a greater magnitude.

As the ECB implements TLTRO, is this an opportunity for European small caps to revive?

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