Small-cap stock has suffered more than average in the past year, among other things, because of high inflation, the war in Ukraine, and also the historical interest rate rises. European small-cap stocks have fallen by 11% in the last two years. Smaller companies are particularly vulnerable in times of crisis due to their difficult access to capital and their low liquidity. This is explained by Birgit Olsen from Bellevue Asset Management in her commentary at e-fundresearch.com.
The weak performance of small-cap stock can also be linked to a phenomenon that has been observed for a decade. Normally, small-cap stocks have a higher return potential. Since 2013, however, investors have not been able to rely on this, and they even achieved a yield disadvantage compared to large-cap stocks. However, several factors now favour a reversal of the most recent signs.
Several factors favour a turnaround for small-cap stocks
An important aspect that now favours a positive development for small-cap stocks is diversification. Investors who incorporate smaller stocks into their portfolios reduce the risk associated with ETFs and funds. With these, the weighting of mega-cap stocks and large-cap stocks is usually high. According to Handelsblatt, it could be even more crucial that small-cap stocks have great opportunities for expansion due to recent developments. They have a low market share and can usually grow significantly faster than larger companies.
Olsen also believes in the comeback potential of small-cap stocks. A first signal of this is the upswing that has been observed in the performance of European secondary stocks since October last year. The increase was 13%. And the weakening momentum of inflation is expected to further spur this development. Meanwhile, the economic environment looks stable.
The basic scenario of Bellevue Asset Management therefore assumes that there will be a gradual improvement in growth in Europe and a soft landing in the USA. Economic stabilisation in the Chinese market would further support the expected turnaround in small-cap stocks.
Where there are opportunities, there are risks
However, there are still risks for small-cap stocks in 2024. A recession could delay a comeback. This also applies to higher inflation or new geopolitical crises.