Looking for small-cap laggards?
The more undervalued Asian small caps have outperformed the large caps by
7% in the past five months. Taiwan, China and Indonesia are the most powerful
small-cap arenas in the region. Interest in small caps is escalating when
investors have finally noted their outperformance and potential to generate beta.
There are two common questions to D&G, “which small caps drove the index
outperformance? Are there still good small-cap laggards with potential upside?”
Although the overall small-cap sector has done well, it is not a blind buy – 78%
of China small caps outperformed the large caps, but there are only 53-68% of
small caps outperforming the MSCI indices in other markets. Buying small caps
still needs to be selective to outperform. The industrial and consumer
discretionary small caps, which were believed untouchable amid the economic
slump, outperformed the most in the past months.
D&G has ranked the small-cap constituents in each market by their YTD share
price performance. To look for laggards, we can refer to the full lists in “Got to
know” (p 4-22). However, D&G seldom does so because looking for small-cap
laggards is usual a reliable indicator of a (short-term) market peaking. Investors
are suggested to wait for D&G’s next batch of carefully selected “hidden jewels.”