fund( VTMGX) gained 11.3 %, a striking 14.7 percentage point outperformance. Vanguard’ s Emerging Markets Stock Index Fund( VEIEX) outperformed the S & P 500 fund as well, beating it by almost 6 percentage points. European equities in particular have benefited from a surge in fund flows, with large-cap stocks seeing their best quarterly inflows in five years.
Valuations And Market Leadership
Brian Chingono, a director of quantitative research and portfolio manager at global asset management firm Verdad, explained the equities rotation in a recent article.
“ When inundated with new capital, many portfolio managers start by deploying money into the most liquid opportunities within their target list,” he wrote.“ Therefore, in our opinion, it takes some time for fund flows to trickle down toward micro-caps, where valuations are most attractive and the upside potential from mean reversion appears to be greatest.” While the notable driver of Europe’ s rally has been the influx of capital into large-cap stocks, Chingono noted that the most attractive valuations are now found among micro-caps and value stocks.
He said micro-cap valuations in Europe are near their most extreme discounts since the dot-com unwind in 2000, trading at just 0.62 times price-tobook on average.
Value spreads among large and small stocks are also at historic highs, suggesting significant upside potential for investors willing to look beyond the largest names.
“ Micro-cap valuations,” Chingono wrote,“ are near the extremes that were reached in 2000, as the dot-com bubble unwound. Today, valuation spreads among micro-caps are 24 % wider than their historical average.” And the same extreme valuation spreads exist between value and growth stocks, especially in micro-caps, providing upside potential for value investors.“ Whereas large value firms currently trade at a 14 % discount relative to their own history, small value and micro-cap value firms trade at a 20 % discount to their own long-term history. In addition to offering deep discounts relative to history, micro-cap value firms also trade at the cheapest absolute valuations in Europe.”
Fund Flows In Vanguard FTSE Europe ETF
April 2020 to March 2025, in billions.
3B
2B
1B
0B
-1B
-2B
Sources: ETF Database and Vanguard
2021 2022 2023 2024 2025
The strong dollar has suppressed international returns for U. S. investors, but if the dollar weakens, this headwind turns into a tailwind for global equities.
Size And Price / Book Distribution Of European Stocks
As of March 31, 2025.
MARKET CAP THRESHOLD
NUMBER OF STOCKS 3 / 31 / 25
SHARE OF OPPORTUNITY SET
MEDIAN PRICE / BOOK
PROPORTION < 1.0x P / B
PROPORTION < 0.5x P / B
The Case For Global Diversification
History shows that leadership between U. S. and international markets is cyclical. While the U. S. has outperformed for an unprecedented stretch, previous cycles have always reversed. Currency effects have also played a major role: The strong dollar has suppressed international returns for U. S. investors, but if the dollar weakens, this headwind turns into a tailwind for global equities.
Economic theory and experience both argue for global diversification, even though it can be psychologically difficult when one region dominates for so long. With U. S. equity valuations stretched and the pillars of past outperformance— low rates, globalization, dollar strength, Fed independence— now on shakier ground,
Price / Book Valuations
March 2025 price / book valuations relative to long-term history( 1996 – 2025).
n March 2025
0.77x
0.90x n Long-Term Median
0.69x
0.86x
0.62x
0.77x
Large Cap >$ 2B 698 20 % 2.11x 17.5 % 3.2 % |
|
|
|
Small Cap |
$ 300M- $ 2B |
856 |
25 % |
1.60x |
26.9 % |
6.3 % |
Micro Cap |
<$ 300M |
1,856 |
54 % |
1.29x |
34.0 % |
12.1 % |
Source: S & P Capital IQ |
|
Large Cap Value
Source: S & P Capital IQ
|
Small Cap Value |
Micro Cap Value |
JUNE 2025 | FINANCIAL ADVISOR MAGAZINE | 37