In 2023, investing in smaller companies is proving to be a winning strategy in emerging markets. These small caps have outperformed large caps by 12 percentage points, marking one of the best relative returns in 14 years. This is partly due to large caps being more exposed to China’s economic challenges.
Small-caps are benefiting from local growth stories, like India‘s, and the trend of investing in AI and electric vehicles. The MSCI Emerging Markets Small Cap Index, with 1,905 stocks averaging $583 million, is up 14.2% year-to-date. In contrast, its large-cap counterpart, with an average size of $7.9 billion, gained only 1.8%.
Individual small-cap stocks like Taiwan’s Wistron Corp. and Global Unichip Corp. have surged by 244% and 125%, driven by AI development. Meanwhile, companies like Jindal Stainless Ltd. and Rail Vikas Nigam Ltd. are up at least 100%, riding India’s rapid economic growth.
While the small-cap sector offers high returns, it also carries higher risk due to its volatility. It’s historically the first to be sold off in times of risk aversion.
For small-caps with sound management and business plans, the next boost may come from central banks cutting interest rates. This could further extend their outperformance and offset concerns about China’s economic slowdown affecting larger stocks.
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