In this Q&A, Nick Williams, Barings’ Head of Small Cap Equities, discusses the opportunities his team is seeing in the current environment, and explains why an active approach, combined with rigorous, bottom-up stock selection, is key to identifying high-quality companies.
Economic growth in Europe is top-of-mind for many investors. How do you expect the current growth picture to impact the small-cap universe?
One of the most attractive characteristics of European smaller companies, in our view, is that their growth is not necessarily reflective of (or impacted by) economic growth. Many of these companies have very strong global market shares, so their growth is more reflective of stock-specific characteristics and qualities. Take Barco, for example. This Belgian technology company is a world leader in digital cinema projectors, specializing in next generation laser projectors amid an ever-increasing drive for improved cinema experience. The company has a 65% market share globally in cinema laser technology, with an opportunity to expand in the largest cinema market globally: the U.S. These exciting niches are precisely what makes the small-cap asset class so compelling, in our view. Small businesses, by nature, tend to be more nimble than their larger counterparts, which can also give them the flexibility to more quickly respond to changing market conditions.
Even in sectors that have historically been more exposed to global economic trends, the breadth of the smaller companies universe provides for a wide range of stock selection and potential growth opportunities. For example, the European small-cap index includes significant weightings in the financials sector, which can be highly cyclical—but within that are companies in certain niche sectors—like payment services—that tend to be less affected, relative to the broader sector, by macro trends.
This lack of correlation to broader economic growth is one of the contributors to smaller companies’ strong performance over time. Since 2000, European smaller companies have outperformed their larger-cap counterparts, registering higher returns at the index level in 15 out of 19 calendar years (FIGURE 1). Even in years when economic growth in Europe was slowing, or contracting—notably 2005, 2009 and 2012—smaller companies outperformed.
European Smaller Companies Have Outperformed Larger PeersSOURCE: Barings, Bloomberg, MSCI Europe ex-U.K. versus MSCI Europe ex-U.K. Small Cap in U.S. dollars. From January 1, 2000 through May 31, 2019. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.