Consensus

Europe is a mess, everyone agrees: poor demographics, sclerotic and oppressive regulation, political dysfunction. European stocks lost 6% last year as the US gained 13%, about as wide a performance gap as we’ve seen in at least the past 50 years.

So how do we explain this chart: small/mid-cap French stocks are at an all-time high.

Consensus is (almost) always logical, but not always right. There are many very good reasons to avoid/underweight European assets. And it’s certainly possible that investors in small cap French stocks have become detached from reality. But it’s also possible that conditions are not as dire as we think, or that valuations more than adequately reflect this reality.

Overweighting European equities may seem like a heroic leap (and I’m certainly no hero), but when we have a combination of record performance differential, broad negative consensus and a market data point (French small caps) that is at odds with the headlines, investors would do well to remember that it’s often comfortable to be with the consensus, but not always profitable.

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