Ask most investors where they are looking to invest these days and most will tell you that some of the best opportunities are right here in the good ole’ USA and many of these investors are Europeans themselves. According to Investment News, European pension funds and their equity managers are ratcheting up exposure to the U.S., according to consultants, managers and pension fund officials. And uncertainty surrounding the euro and its impact on euro zone economies is pushing investors faster into the arms of Uncle Sam.
Many investors are particularly attracted to US small caps where the valuations are attractive and according to published research from Furey Research Partners less than 20% of publicly traded small caps revenues come from outside the US. But it’s not just earnings that matter but valuation. Small caps typically are priced on forward earnings which can be very sensitive to US GDP growth. This is where a good active manager can really add tremendous value since a good small cap manager will look for companies with sustainable growth and historically have shown some resiliency to the US economy such as the utility sector.
The other reason for attention to US small caps is the market may be trying to price in another round of Fed quantitative easing and love it or hate it as the ole saying goes “don’t fight the fed” really applies to the small cap space as the in the past two rounds of QE, the Russell 2000 index comp has rallied an average of 20% over the next three months and over 40% over the subsequent six months (The Russell 2000 is by far the most common benchmark for mutual funds that identify themselves as “small-cap”, while the S&P 500 index is used primarily for large capitalization stocks).
While there are still risks to the US economy many US companies have built up an ample supply of cash on their balance sheets which makes them able to increase growth through mergers and acquisitions. According to an article in the Wall Street Journal dated Jan. 2, 2012 and titled “On Wall Street, Renewed Optimism for Deal-Making,” a survey by Ernst & Young anticipates that “36 percent of companies plan to pursue an acquisition this year.” With many CEOs of publicly traded companies being pressured to increase shareholder value, acquiring a smaller company with higher growth rates and technology innovation seems to be a smart way to go.