Global small-cap stocks lure bargain hunters after 2023 slump
backgrounds
・The stock prices of small and medium-sized enterprises, which have continued to be delayed for most of 2023, are attracting investors on both sides of the Atlantic by balancing the benefits of interest rate declines expected next year with concerns about the financial crisis.
・Small cap stocks in the US $Russell 2000 Index(.RUT.US$ has risen more than 13% from the October low, and the MSCI European Small and Medium Cap Index has risen 12% since the end of last month.
・The recent surge in small-cap stocks is in contrast to previous years. $S&P 500 Index(.SPX.US$ While it has risen 19% since the beginning of the year, the Russell 2000 Index has only risen 5%. Meanwhile, European small-cap stocks rose more than 6% in 2023, while the broader MSCI European Equity Index rose 12%.
・According to the LSEG data stream, the value of small-cap stocks in the US is close to a record low in terms of relative value to large stocks. The expected PER for the small-cap S&P 600 is 13.7 times the long-term average of 18 times, which is well below 19 times the current level of the S&P 500.
・The expected price-earnings ratio (PER) for European small-cap stocks is 12.2 times, below 15 times the average for the past 15 years, and below 12.3 times the current PER of the wider MSCI Europe.
The views of market participants
・Rory Stokes, portfolio manager of Janus Henderson's European Equities Team, said, “We are close to the relative underperformance of two and a half years, and if you look at the current valuation ratio of small-cap stocks, they are extremely undervalued.”
・If the inflation rate continues to decline, such valuations are increasing the appeal of small-cap stocks in the rising exchange rate of multiple assets, which originated from the view that central banks around the world will begin cutting interest rates in 2024. According to recent data, consumer prices in the US, Europe, and the UK have cooled more than expected.
・In response to the interest rate increase cycle where borrowing costs have risen to the highest level in recent decades, while the Federal Reserve and the European Central Bank are each incorporating interest rate cuts of 125 basis points (bp) or more next year, government bond yields, which serve as indicators, have also declined.
・Investors say this is good news for small-cap stocks.
・There is a possibility that the rise in borrowing costs will cause greater damage to small and medium-sized enterprises that have a strong tendency to rely on short-term loans that are currently being raised at higher costs since interest rates have been at the bottom for many years.
・Cressett Capital's chief investment officer Jack Ablin said the “rope has loosened” for many small-cap stocks due to recent declines in US Treasury yields.
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