Public Equities

Three Reasons to Consider a Long-Term Allocation to Small-Caps

April, 2020 – 6 min read
The volatility driven by COVID-19 and the fall in oil prices has created much uncertainty—but it has also provided a potential opportunity to make long-term investments at attractive prices.

Small-cap equity markets have certainly experienced challenges related to the coronavirus fallout and significant decline in oil prices. And while risks remain, the recent market volatility has also resulted in a potential opportunity—particularly for long-term investments in good businesses with solid growth potential that have seen their share prices weighed down as a result of the pandemic.

In particular, we think there are three reasons small-cap equities are worth consideration for long-term investors.
 

1. Valuations Look Attractive Relative to History

European and International smaller companies fell by more than 20% in the first quarter, a steep drop reflective of the concern surrounding the spreading coronavirus. The bulk of this decline came in March as business confidence around the world faltered in response to the lockdown conditions being imposed across a number of economies. The severity and longevity of this crisis, and its ultimate impact on the global economy, are impossible to predict with any certainty—indeed, economists continue to debate over a muddled alphabet soup of potential economic recovery slopes. The effect on corporate earnings is equally as uncertain, although it seems very likely that a swathe of downgrades may be coming.

But the picture isn’t all negative. One result of the weaker performance and share price declines is that smaller companies have experienced an erosion of their price-earnings premium relative to larger companies. While small-cap valuations have not yet reached historic trough levels, they have become notably cheaper—and we believe they now look very attractive relative to history, and to larger companies. Going forward, with interest rates across developed markets generally at historic lows, and amid intensifying quantitative easing by central banks, equity earnings yields should remain supported—as long as earnings do not fall more precipitously than what markets are currently pricing in.

Want to read the full article?

View PDF

Nick Williams

Head of Small Cap Equities

Any forecasts in this material are based upon Barings opinion of the market at the date of preparation and are subject to change without notice, dependent upon many factors. Any prediction, projection or forecast is not necessarily indicative of the future or likely performance. Investment involves risk. The value of any investments and any income generated may go down as well as up and is not guaranteed by Barings or any other person. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Any investment results, portfolio compositions and or examples set forth in this material are provided for illustrative purposes only and are not indicative of any future investment results, future portfolio composition or investments. The composition, size of, and risks associated with an investment may differ substantially from any examples set forth in this material No representation is made that an investment will be profitable or will not incur losses. Where appropriate, changes in the currency exchange rates may affect the value of investments. Prospective investors should read the offering documents, if applicable, for the details and specific risk factors of any Fund/Strategy discussed in this material.

Barings is the brand name for the worldwide asset management and associated businesses of Barings LLC and its global affiliates. Barings Securities LLC, Barings (U.K.) Limited, Barings Global Advisers Limited, Barings Australia Pty Ltd, Barings Japan Limited, Baring Asset Management Limited, Baring International Investment Limited, Baring Fund Managers Limited, Baring International Fund Managers (Ireland) Limited, Baring Asset Management (Asia) Limited, Baring SICE (Taiwan) Limited, Baring Asset Management Switzerland Sarl, and Baring Asset Management Korea Limited each are affiliated financial service companies owned by Barings LLC (each, individually, an “Affiliate”).

NO OFFER: The material is for informational purposes only and is not an offer or solicitation for the purchase or sale of any financial instrument or service in any jurisdiction. The material herein was prepared without any consideration of the investment objectives, financial situation or particular needs of anyone who may receive it. This material is not, and must not be treated as, investment advice, an investment recommendation, investment research, or a recommendation about the suitability or appropriateness of any security, commodity, investment, or particular investment strategy, and must not be construed as a projection or prediction.

Unless otherwise mentioned, the views contained in this material are those of Barings. These views are made in good faith in relation to the facts known at the time of preparation and are subject to change without notice. Individual portfolio management teams may hold different views than the views expressed herein and may make different investment decisions for different clients. Parts of this material may be based on information received from sources we believe to be reliable. Although every effort is taken to ensure that the information contained in this material is accurate, Barings makes no representation or warranty, express or implied, regarding the accuracy, completeness or adequacy of the information.

Any service, security, investment or product outlined in this material may not be suitable for a prospective investor or available in their jurisdiction. Copyright in this material is owned by Barings. Information in this material may be used for your own personal use, but may not be altered, reproduced or distributed without Barings’ consent.