SSGA-SPDR: Size or Value? Investors can benefit from both in a recovering economy

SSGA-SPDR: Size or Value? Investors can benefit from both in a recovering economy

Aandelen
Beursvloer (01)

Size or Value? Investors Can Benefit from Both in a Recovering Economy. Smaller stocks (by market capitalisation) have led the equity market rally year to date, across all major regions, but most notably in the US and Europe. As businesses reopen in 2021, small cap stocks should benefit from their sensitivity to the real economy and higher domestic focus.

Global equity markets have had a strong start to 2021, with all major regional indices trading positive as we near the end of Q1. While much of the headline attention in the US market is paid to the mega cap FAANG stocks, the strongest performing strata of the market capitalisation (cap) spectrum has been indices that focus on small cap stocks.

In the US, the Russell 2000 Index – which consists of stocks with a market cap below $10 billion – has been on a tear. Year to date, the Russell 2000 is up 15.88% overall. That is an 11.25% outperformance of the more closely followed S&P 500 Index, which is comprised of large and mega cap stocks. European equities have a similar story to tell. The MSCI Europe Small Cap Index is up 9.06% overall, which is a 1.5% better than the MSCI Europe Index.

In 2020, smaller businesses suffered disproportionately from the negative impacts of the global pandemic, both in terms of the short-term business disruption and the longer-term threat to financial viability. Investors exposed to a broad large cap index – like the S&P 500 Index – when the pandemic hit, would have benefitted from the diversification toward stocks like the FAANGs (e.g. Technology stocks supporting the digital economy).

The bigger balance sheets of large cap stocks also allowed many to take advantage of the depressed interest rates to expand their capacity to withstand a prolonged recession in consumer activity. Small cap stocks would have also benefitted from this, but at a much smaller scale.

Bottom line, small cap stocks generally suffered from deeper discounting as a result of the global pandemic. This all changed in November of 2020, when key announcements surrounding promising vaccine developments caused this ‘discounting’ effect to reverse.

While much of the small cap rally observed this year can be attributed to a reversal of the pandemic discount, we believe there is more room to run. As business activity resumes, and even ramps up, the traditional behaviour of small cap stocks in recovery should take hold. The same mechanisms that made smaller businesses more fragile on the way down should make them more leveraged on the way up.

Similar tailwinds exist for Value stocks, which have followed a similar trajectory to small caps, albeit at a more modest magnitude. In March, we have seen Value begin to catch up with small caps, and investor sentiment suggests both exposures will have more capacity to rally.