By Carl Delfeld of the Chartwell ETF Advisor
While the United Kingdom exchange-traded fund or ETF (EWU) has been doing quite well and the FTSE 100 is at a six-year high, it has been weighed down by the lackluster performance of its mega cap stocks. The twelve largest companies in the index account for a surprising 54% of the index. These dozen companies have underperformed the overall index this year by 6.8%.
The Financial Times reported that Citigroup research also highlights that the valuations of big companies are falling behind smaller companies. Europe's 50 largest companies trade at about 12 times forward earnings versus 14 times for large caps and 16 times for mid caps. In 2000, the valuations were reversed.
One explanation is that global investors do not appreciate the stability of earnings from the mega companies in the current risk taking environment and also the role of M&A and private equity which is centered on smaller companies.