- The future belongs to Asian’s small and mid companies –

Investors focusing on Asia have the biggest opportunities for profits if they invest in small-cap and mid-cap companies. An analysis by fund company Fidelity International shows that securities of smaller companies have outperformed the big groups over the past five years. This development will strengthen in the future, says Catherine Yeung, Investment Director Asia (ex Japan) at Fidelity International. Many small and mid companies are privately managed in Asia. This means that they are particularly well-placed to adjust fast to new trends. Local brands in particular are growing rapidly and are able to multiply their profits. This is especially evident in the upcoming consumer sector in Greater China (China, Hong Kong, Taiwan).

Small and mid-sized companies are gaining ground in Asia. Their shares have increased by 79 percent and 74 percent respectively over the past five years, better than shares in large companies, which rose by 72 percent. “The differences in value performance will most likely get even bigger over the coming years. A large number of small-caps and mid-caps have only developed in Asia during the last decade at the stock markets. A lot of these companies will grow their market shares – also in the international environment – over the coming decade and they will become market leaders. And this will generate an attractive return for investors,” commented Catherine Yeung, Investment Director Asia (ex Japan) at Fidelity International. Baidu is just one example of the rapid rise in the fortunes of a company. “The Chinese Google is a success story. The growing Internet penetration in China will mean that the company continues to develop at high speed,” according to Yeung.

The strength of small and mid-cap companies in the new boom sectors, like the consumer sector in China, Taiwan and Hong Kong, is particularly high profile, and there are some very exciting companies with lots of potential for growth, according to an analysis by Fidelity International. This shows that small and mid-sized companies in the consumer sector operating in Greater China have increased their value by 182 percent in the past five years. Excluding the five weakest securities, the companies achieved a market capitalization of up to 5 billion US dollars and increased their value on average by as much as 220 percent. Big companies contrasted with this development by only generating growth of 174 percent. Travel operators, clothing manufacturers, department stores and manufacturers of luxury goods were particularly successful. “Small and mid-caps in Asia are often family-run businesses. This gives them first-mover advantage when it comes to developing innovative ideas and launching new products on the market,” according to Yeung.

Having said that, the companies demonstrate very differing strengths. The best company in Greater China’s consumer sector grew by 625 percent, while the worst company lost 55 percent of its value. “Small and mid-sized companies have the potential to double their value or even increase value threefold. Nevertheless, there is also the risk of a major loss in value,” comments Yeung. “That is why stock picking is key.”

The potential of small and mid-sized companies is also highlighted by the initial public offerings in the recent past. Newcomers to the stock market have achieved an average development in value of nearly 80 percent with an IPO volume of more than 500 million US dollars from the consumer sector in Greater China since April 2006: “We have seen some interesting stock-market debuts in Greater China’s consumer sector. Greater China will grow to rank among the biggest stock markets in the world. The most attractive companies are frequently in the market-capitalization segment between 0.5 and 5 billion US dollars. This is because these companies are in the process of conquering market shares and they exploit their growth potential to the full,” according to Yeung.

Investment teams operating on the ground find it easier to identify these companies because the information available on small and mid-caps is not as extensive as with large caps. This is particularly the case in emerging markets like China. “Our investment experts not only look at the companies themselves, they also talk to the suppliers, competitors and customers,” explains Yeung. “This enables them to select the securities with the brightest prospects.”

The analysis measures the development of Asian small caps on the basis of the MSCI Asia Pacific Small Cap. The figures for Asian mid-caps and large caps are based on the MSCI Asia Pacific Mid Cap and the MSCI Asia Pacific Large Cap. The development of the consumer sector in Greater China was calculated with the assistance of the MSCI Golden Dragon Index (all data as at 31 March 2011). The share of a company was regarded as a large cap if it has a market capitalization of more than 5 billion US dollars. Companies with a market capitalization between 1.5 billion and 5 billion US dollars were classified as mid-caps. And a company with a stock-market value of less than 1.5 billion US dollars was rated as a small cap.