After lagging the wider market in the wake of aggressive monetary policy tightening, the evolving macroeconomic backdrop looks set to put small cap stocks back in the spotlight again.
Small caps - companies with a market capitalisation of less than €5bn – are typically viewed as higher risk, albeit with the potential for higher returns, when compared to their large-cap counterparts. But because of their typical growth characteristics, the sharp increase in interest rates heavily dampened small caps’ performance in 2022 and 2023, despite decent financial results from many companies.
Even so, at a global level small caps achieved a still respectable total return of 17% over the 12-month period, though large caps delivered a stronger 24%. However, between the end of 2008 and the end of 2023 small caps have outperformed, delivering a cumulative return of 521% against 466% for the large cap index over the 15-year period – although past performance should not be seen as a guide to future returns.1
In addition, it’s also sometimes – incorrectly in our view – thought that small caps are much more volatile than their larger peers. Over the longer term, the difference is relatively small, as shown in the chart below.
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