Despite the difficulties faced globally in 2022/23, the outlook for small-cap stocks is optimistic, thanks in part to appealing valuations and promising investment opportunities within the asset class, according to a global investment manager.
“2022 was a very tough year for our asset class. We were going up against significant headwinds. I call them the three Ps – the pandemic in China, Putin in Ukraine and Russia, and also [Federal Reserve Chair Jerome] Powell in the US all creating pretty significant headwinds for our asset class,” American Century vice-president and senior portfolio manager Trevor Gurwich told a media briefing on Wednesday.
“However, on the other side, when you go into a better environment, when headwinds turn into tailwinds, we actually see pretty remarkable rebounds.
“Small caps have lagged their large-cap peers, but that may create opportunity for small-cap investors. The headwinds that have weighed on small-cap performance, including inflationary pressures, appear to be easing. The combination of attractive small-cap valuations and a wide range of small-cap companies with accelerating earnings growth bodes well for small-cap returns.
“Diversification is key in this market. We are finding compelling bottom-up opportunities with diverse drivers of earnings growth, including companies that are benefiting as economies in Asia reopen, trends towards near-shoring and an acceleration in demand for medical procedures post COVID.”
He highlighted the strong rebound potential of global small caps in post-recession periods, which is particularly pertinent considering the gloomy economic predictions for possible future recessions in developed countries.
“Most of the recessions we have seen in the past, the dot-com bubble, the financial crisis and COVID, for example, we have seen significantly higher recoveries of this asset class than in the larger-cap asset class,” he said.
“We think that the outlook is pretty interesting now [for global small caps] because we have had a pretty large correction, valuations are reasonably cheap, outlooks are quite favourable and there are multiple areas within our universe where we are finding these opportunities.
“Looking at 2023, you are still seeing pretty strong growth of 14 per cent on a global basis and that’s versus 8 per cent in the large-cap space. If we look forward one year, you’re looking at even faster growth of 21 per cent for the global small-cap universe.
“So we think the risk for global small caps right now is quite appealing.”
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