If there’s a pull back, and there will be eventually, then the asset to buy on the dips is global small cap stocks, say investment analysts with Schroders. Global small cap stocks have returned 317% since the lows in the S&P 500 in March 2009, but may still be good value. They’ll be especially good if the market finally corrects.
For investors to hop on board with Schroders, small cap valuations will have to retreat.
Schroders thinks that small-cap valuations are “relatively attractive,” despite their rapid rise over the last 12 months. Global small caps’ 10-year median P/E is 25.8, compared with large caps’ P/E of 16. So on average global small caps have traded on a 61% premium to large caps since 2007. Today that premium is 46%. The U.S. and U.K. are the most expensive.
“A new generation of winners are emerging – ‘capital light’ companies with a strong online presence,” says
Matthew Dobbs, Schroders’ global head of small cap stocks. He didn’t name names, but Dobbs is also an Asian small cap fund manager for the firm. “As industries evolve in this direction, barriers to entry are reduced and innovations progress faster, creating increasing opportunities for small companies.
For investors, each investment will need to be evaluated on a company by company basis. They should not rely on the assumption that the small cap premium will operate universally.”
Schroders listed four must-haves for small caps, though the fourth one might be harder for newcomers:
- Be a market leader in their niche and growing.
- Have a unique product or service to differentiate it from rivals.
- Good management who preferably hold substantial a stake in the business.
- Be cash generative and profitable.
The MSCI Global Small Cap Index has returned 317% since March 2001, including dividends, compared with 107% for the MSCI Global Large Cap Index, based on Schroders calculations.
If there’s a pull back, and there will be eventually, then the asset to buy on the dips is global small cap stocks, say investment analysts with Schroders. Global small cap stocks have returned 317% since the lows in the S&P 500 in March 2009, but may still be good value. They’ll be especially good if the market finally corrects.
For investors to hop on board with Schroders, small cap valuations will have to retreat.
Schroders thinks that small-cap valuations are “relatively attractive,” despite their rapid rise over the last 12 months. Global small caps’ 10-year median P/E is 25.8, compared with large caps’ P/E of 16. So on average global small caps have traded on a 61% premium to large caps since 2007. Today that premium is 46%. The U.S. and U.K. are the most expensive.
“A new generation of winners are emerging – ‘capital light’ companies with a strong online presence,” says Matthew Dobbs, Schroders’ global head of small cap stocks. He didn’t name names, but Dobbs is also an Asian small cap fund manager for the firm. “As industries evolve in this direction, barriers to entry are reduced and innovations progress faster, creating increasing opportunities for small companies.
For investors, each investment will need to be evaluated on a company by company basis. They should not rely on the assumption that the small cap premium will operate universally.”
Schroders listed four must-haves for small caps, though the fourth one might be harder for newcomers: