For those who invest in European micro/small caps, how does the data compare to North America? Does your model work equally well in both regions? Any comments would be appreciated.
In my experience, a ranking or factor-based model should travel reasonably well between regions, including Europe and United States / Canada, but it should not be applied blindly.
Before allocating to European micro- and small-caps, the most important step is to decide which countries you want to invest ināor explicitly avoid. Europe is not a single homogeneous market. You need to take into account that you will mix in the same bucket:
- Country-level risks (political stability, rule of law, corruption indices)
- Equity risk premiums, which are generally higher in parts of Europe than in North America
- Broker access and liquidity constraints, which can materially affect implementation in microcaps
There are also meaningful differences in business culture and corporate governance across European countries, shaped by very different legal systems and historical backgrounds. This could creates more dispersion in outcomesāboth positive and negativeāthan investors may be used to in North America.
From a market-structure perspective, European micro/small caps are less researched, less liquid, and generally less efficient than their US or Canadian counterparts. That can be an advantage for disciplined ranking models, but it also requires more patience
If you want to cluster by country, region, or business characteristics, you certainly canābut you may quickly run into sample-size limitations, especially at the microcap level.
In some cases, the sample may simply not be large enough to draw statistically robust conclusions at a country or sub-region level. In others, you might still uncover meaningful patterns. At this stage, Iād frame it as an open question and an area for further investigation, rather than something to assert with high confidence.
Despite the added complexity, there are still plenty of high-quality businesses in Europe for investors willing to do the extra work.
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My fundamental factor rankings work better in Europe than the US. US is too prone to speculative manias and meme stock mindsets where fundamentals fall by the wayside and any mention of the word āvalueā is ridiculed as an old time anitquated concept. (perhaps weāre starting to see the regime shift in the last few months). If one believes that most quantitative factors have been āarbitragedā in the US markets, it doesnāt appear so in Europe.
@ScifoSpace thank you for the information.
My model tends to perform best when I combine regions, so I have been considering adding Europe to see if that trend continues. I wish there was a way to just pay for a āregionalā trial to run my system to see if it would be worth subscribing for the year.
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@ScifoSpace Do you think Asia/Emerging markets will provide better hunting grounds for micro/small caps than Europe?
Canadian stocks have a lot more in common with European stocks than US stocks do, for a number of reasons (see below), so I would advise you to experiment with Canadian stocks if you want to test things out in Europe.
- US stock prices are often influenced by a large contingent of retail traders who follow social media trends. This is not the case in Canada or Europe.
- US stocks follow GAAP while Canadian and European stocks follow IFRS for their accounting rules. This will definitely change how certain line items are viewed.
- US stocks under $1 are largely bankrupt companies or companies that are cheap for a very good reason. This is not the case in Canada or Europe, where you have very healthy companies trading for pennies.
- US stocks have much, much tougher listings requirements than in Europe or Canada. (This is the reason for the major difference between low-priced stocks: US markets delist companies whose stock price is less than $1 while Canadian and European markets don't.)
- US stocks are easier to trade almost everywhere in the world.
So, all in all, if you don't have access to Europe but want to try "Europe" anyway, focus on Canada for a while and see what works there.
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@falnu Asia and emerging markets are likely to offer hunting grounds for micro- and small-cap opportunities that are at least as attractive as those in Europe. Until a few years ago, Poland itself could still be considered an emerging market, and even today there are solid companies trading at reasonable prices or clearly undervalued. Once markets or institutional investors begin to allocate capital and momentum builds, a broad range of opportunities tends to emerge.
That said, data quality should not be expected to be as strong or as consistent as in the US. Differences between IFRS and US GAAP already matter, and in more exotic markets these issues become even more pronounced. In practice, only markets such as Australia, New Zealand, HongKong, Singapore amongst others may offer a sufficiently reliable balance between opportunity and transparency.
Ultimately, the main risk of any business lies in where it operates rather than where it is listed. This is already evident in large US corporations that generate a significant portion of their revenues outside the US. Accordingly, equity risk premiums should differ meaningfully across regions. For these reasons, building and applying a ranking system is more challenging in emerging markets, but it is still worth attempting given the potential upside.
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