Equity specialist sees benefits of small caps
Small and mid-cap stocks are better picks than large caps for investors who want to cash in on the growth in emerging markets, Nathalie Wallace has said.
The senior portfolio manager of equity specialist Batterymarch’s emerging markets team said: “Small and mid-cap companies typically bounce back more quickly during economic downturns and tend to be more closely tied to the local economy.”
She said smaller companies are better positioned to benefit from local growth as they are more agile in responding to local demand, which has been booming in emerging markets as a result of improved monetary and fiscal disciplines and massive infrastructure investment.
The S&P Emerging Markets Broad Market Index is skewed towards financial, energy and other sectors that generate a large proportion of revenues overseas, whereas the equivalent for mid and small caps shows return is spread across real estate, capital goods, consumer durables, retailing and other local businesses.
Small and mid caps in emerging markets also offer higher returns at cheaper prices than larger caps - they have higher two-year EPS growth and lower price-to-book ratios.
However, the perception of individual retail investors could be different to this, according to Gavin Haynes, managing director for Bristol-based Whitechurch Securities.
He said: “It depends on the time horizon of their investments and tolerance for risk. Smaller caps do offer opportunities, but they have less research and development capacity, their return is more volatile and therefore riskier than larger caps.
“Investment in these companies is more suitable for clients with long-term investment plans who are more able to withstand the volatility. We are cautious when making investment in these companies in emerging markets and tend to leave the allocation to fund managers with specialist expertise in the area.”