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Aberdeen Standard Investments’ Kirsty Desson discusses outperformance of small caps

Kirsty Desson, Investment Director at Aberdeen Standard Investments, gives her thoughts on the outperformance of Global Smaller Companies and why this will continue.

 

Small cap stocks have outperformed large caps over the long term by a staggering 320% since 2000.

Whilst small cap outperformance has been largely consistent, the periods of greatest performance divergence over the last 20 years have been post the tech bubble, from 2001 to 2005, and post GFC from 2009 to 2011. These were periods of market recovery when more economically sensitive, nimble stocks were able to react quickly to the changing environment.

We are experiencing similar conditions today.

Crucially, whilst small cap share prices have recovered, relative valuations are still favourable for small cap stocks.

Not all small caps are created equal

As we look into the second half of the year, changes are afoot once again. In deciding upon where to place their money, investors need to be aware of two key factors: firstly, a company’s ability to sustain growth and secondly, its ability to withstand higher input costs and tightening liquidity.

Since the start of the year, (almost) all boats have been lifted by the tide of stimulus induced growth. The economic recovery from the lows of 2020 has been faster and sharper than expected. Pent up demand post the US-China trade war in 2019 coupled with unprecedented government support packages during the pandemic have sparked a wave of corporate and consumer spending.

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