investment viewpoints

Will European consumers drive a SMID resurgence?

Will European consumers drive a SMID resurgence?
Florian Ielpo, PhD - Head of Macro, Multi Asset

Florian Ielpo, PhD

Head of Macro, Multi Asset
Johan Utterman - Senior Portfolio Manager

Johan Utterman

Senior Portfolio Manager

After a period of strong US growth, the global economy is likely to be in the early stages of a slowdown. At first sight, this natural phase of normalisation is good news for the medium-term prospects of financial markets: without this deceleration, monetary tightening would persist and make a successful soft landing unlikely.  

Such moderation also allows the dominant engine of growth – consumption – to achieve a better balance between the world's three major economic zones: the US, China and Europe. This week in Simply put, we ask: what are conditions like in each of them, and how should equity investors approach this rebalancing phase? To find an answer, we look at both nowcasting indicators and market performance. 


Need to know:

  • As consumption supports the soft-landing scenario, European shoppers are lagging their American and Chinese counterparts
  • Historically, the appetite of consumers in each of these regions has correlated with the strength of smaller companies in their respective stock markets
  • As indicators signal that European consumption is growing stronger, the ‘small-size effect’ could return to the fore after consecutive years of large-cap dominance


A tale of three consumers

About 65% of global consumption takes place in three regions: the US (30%), Europe (20%) and China (15%). Over time, consumption has grown in importance and has been influenced by the major rebalancing of Chinese growth from an investment-driven model to one based more on consumption and services. Tracking and analysing the dynamics of these major consumption zones is essential for any market economist. 

Our nowcasting indicators incorporate consumption components for three regions. Their ups and downs, and combined average, since the early 1990s are shown in figure 1. We can see that each recession features a consumption slump in at least two of these zones – take the 1990, 2001 and 2008 downturns, for example. 

In the past year, the time lags between the consumption upswings in each region support the case for a soft landing. First, Chinese consumers hit the shops after Covid-19 restrictions ended, followed by Europeans and then Americans. Even though all zones are improving, consumption in Europe is weakest, which probably contributes to the collective pessimism about the economy’s prospects. But could European consumers simply be recovering more slowly, with further strength to come? If this is the case, which markets could benefit from the coming improvement?

FIG 1. The consumption component of our nowcasting growth indicator

Source: Bloomberg, LOIM at March 2024. For illustrative purposes only.

Look to small- and mid-caps

In equity markets, small- and mid-cap stocks usually benefit the most from strengthening consumption. There are various ways for us to assess this dynamic, but the simplest is probably to calculate the correlation between the returns of different equity indices and these consumption components of our growth nowcaster. The results are presented in figure 2, with the left chart focusing on small- and mid-cap indices and the right showing the earnings for large caps. There are three messages:

  1. The link between consumption and stock performance seems clear: improving consumption across the US, Europe and China is positively linked to the performance of stocks of all sizes
  2. The performance of small- and mid-caps are more closely linked to European consumers than the others. Chinese small caps are more closely linked to Chinese consumers
  3. In the US, the situation is different: European consumer spending appears to be the most correlated with the performance of US small- and mid-caps

These charts convey a simple message: gradually improving European consumption could well support the valuations of US and European small- and mid-caps. The recent rally in indices such as the Russell 2000 may be the first sign of this.

FIG 2. Correlation between equity index returns and consumption indicators

Source: Bloomberg, LOIM at March 2024. Past performance is not a reliable guarantee of future results. For illustrative purposes only.

‘Size’ matters

The academic literature is full of it: the 'size' factor that leads small- and medium-sized companies to outperform the stocks of larger companies. This has long been a key driver of many asset-allocation decisions. But in the last few years, this track record has fallen on hard times as US large caps rode over everything in their path. 

Figure 3 provides further evidence for those who still believe that the size factor is not dead. It contains three graphs showing the correlations of the large- and small-cap indices with our consumption indicators, organised by region. It shows a clear trend: the strength of the local consumer matters more to smaller caps and large companies. 

This finding, combined with the view that European consumption is improving, paints a positive picture for European small- and mid-caps. It could well be a key macro trade in 2024. 

Figure 3: Correlation between equity index returns and consumption indicators

Source: Bloomberg, LOIM. Past performance is not a reliable guarantee of future results. For illustrative purposes only.


Simply put, as European consumption gains strength, small- and mid-cap equities in the region could stand up to large companies.

Macro/nowcasting corner

The most recent evolution of our proprietary nowcasting indicators for global growth, global inflation surprises, and global monetary policy surprises are designed to track the recent progression of macroeconomic factors driving the markets.

Our nowcasting indicators currently show:

  • Growth has declined recently, mainly due to US data
  • Inflation is rising in the US, the eurozone and China
  • Monetary policy, led by the US and China central banks, is taking a dovish lean

World growth nowcaster: long-term (left) and recent evolution (right)

World inflation nowcaster: long-term (left) and recent evolution (right)

World monetary policy nowcaster: long-term (left) and recent evolution (right)


Reading note: LOIM’s nowcasting indicators gather economic indicators in a point-in-time manner in order to measure the likelihood of a given macro risk – growth, inflation surprises and monetary policy surprises. The nowcaster varies between 0% (low growth, low inflation surprises and dovish monetary policy) and 100% (the high growth, high inflation surprises and hawkish monetary policy).

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