(Bloomberg) — As the final quarter of 2023 approaches, a winning strategy in emerging markets is becoming clear: buying shares in smaller companies.
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The business has earned an extra 12 percentage points over the MSCI Large-Cap Index so far this year, certainly the second-best relative return in the last 14 years. One reason for this is that large-cap companies are more likely to be exposed to China’s economic troubles.
Small-caps, on the other hand, are benefiting from the investment craze in young companies in artificial intelligence and electric vehicles along with local growth stories like India.
“Small caps in EM have outperformed large caps since the COVID downturn, which is consistent with past historical examples when smalls have outperformed recessions,” said Zitaniya Kandhari, deputy chief investment officer at Morgan Stanley Investment Management. Have outperformed larger stocks.” Which has more than $1 trillion in assets under management. “The strong domestic recovery cycle led to the initial outperformance and the underperformance of mega-caps further extended it.
The MSCI Emerging Markets Small Cap Index, which includes 1,905 stocks with an average market value of $583 million, is up 14.7% so far this year. This compares with a 2.5% gain in its large-cap counterpart, where the average size is $7.9 billion.
development stories
Individual small stocks are delivering some impressive returns: Taiwan’s Wistron Corp and global Unichip Corp have gained 255% and 131%, respectively, this year on the back of their ties to artificial intelligence developments. Stocks like Jindal Stainless Ltd. and Rail Vikas Nigam Ltd. are at least 100% higher, driving India’s economic growth, which is the fastest among major economies.
the story continues
South Korea’s EcoPro BM Co posted the best gain on the Bloomberg Electric Vehicle Index with a gain of 204%. Brazilian education company Yduqs Participios SA has surged 103%, rewarding investors who bet on a post-Covid recession recovery by emphasizing digital revenues.
China dominates the large-cap index with 375 entries, more than half the total. That means a 29% decline this year in big Chinese companies including Meituan and a 43% decline in JD.com Inc. has dragged the entire index down. India’s Adani Group of companies also pressured the gauge after a short seller alleged governance and transparency issues in a report.
“The outperformance of small caps over large caps in emerging markets is more pronounced by the country skew,” said Ashish Chugh, money manager at Loomis Sales & Co. Portfolios that underweighted China and prioritized India, Taiwan and Korea might have done well. He said, in any category.
But excessive returns also mean increased risk for investors. Emerging market small caps are extremely volatile and are the first to be sold when risk sentiment sours. They caused huge losses to investors during the dot-com crisis of 2000, the financial crisis of 2008, and the US-China trade war of 2018, on each of which occasions the MSCI small-cap index underperformed its large-cap counterpart by about 30%. Did.
Low levels of regulation, political interference and governance issues plague the small-cap sector. Even in large economies like India, such stocks are the target of market manipulators, leaving retail shareholders with worthless investments.
For small-cap stocks with good management and business plans, the next boost may come from central banks that are preparing to cut interest rates. A new growth cycle could boost their outperformance and counter investor concerns over the impact of China’s slowdown on major stocks, said Nenad Dinik, equity strategist at Bank Julius Baer in Zurich.
“Small caps benefit significantly from the backdrop of low borrowing costs, as they are often more reliant on debt financing than their large-cap counterparts,” Dinnick said.
what to watch
In a week packed with economic data and interest rate decisions, investors will be looking for clues that policymakers are doing enough to control inflation and accelerate growth.
China to announce its decision on prime lending rate; Forecasts are for no change, but traders will look for signs that the nation will continue to provide stimulus to break out of the deflation spiral.
Turkey, which has adopted market-friendly policies under the new term of President Recep Tayyip Erdogan, could raise rates by 5 percentage points to 30%; Reaffirmation of the conservatism of rates in the country could further increase the country’s wealth
Rate decisions are also due from Taiwan, Indonesia, South Africa and Brazil
Mexico to publish inflation, retail sales and economic activity data
Argentina to release data on economic growth, trade and budget balance
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Source: finance.yahoo.com
