
Figure 1 | Strong (>3%) Rebounding Economic Growth Has Historically Supported Global Small-Cap Returns
MSCI ACWI Small Cap and ACWI Returns When Global GDP Exceeded 3% and Improved YOY
The 2021 Outlook for Global Small Caps
Global small caps strongly rebounded in the last few months of 2020. This comeback helped them outpace large-cap stocks by nearly 26% since the first quarter’s lockdown-induced lows. (Source: FactSet.) Investor sentiment turned markedly positive in the fourth quarter thanks to encouraging COVID-19 vaccine news and the vaccine rollout’s potential impact on global economic growth.
This market optimism persisted despite an increasing possibility of weaker, near-term economic activity due to rising daily case rates and the threat of more shutdowns.
We also believe certain tailwinds are supportive of global small-cap returns in 2021:
Global small caps are more cyclically exposed than their large-cap peers and have led the markets during past economic expansions. The expectations for strong and rebounding global economic growth have the potential to support global small-cap returns in 2021.
MSCI ACWI Small Cap and ACWI Returns When Global GDP Exceeded 3% and Improved YOY
On an equal-weighted basis, global small caps are expected to deliver 28% EPS growth in 2021, according to FactSet consensus estimates—a premium to their large-cap counterparts.
MSCI ACWI IMI Regions
Small caps have historically been the key beneficiaries of merger and acquisition activity. Despite the pandemic, 2020 was a record year of capital raising, exceeding $3.6 trillion globally. Small caps may benefit if this capital raising spurs large caps to acquire small caps as economies recover. We also have witnessed several global small-cap companies strengthen their competitive positions by accessing either the debt or equity markets in 2020 to help fund bolt-on acquisitions. For small-cap companies with strong management teams and a disciplined approach to mergers and acquisitions, this may further accelerate earnings growth.
Historically, global small caps have rallied much quicker than their large-cap counterparts in the one-year period post-drawdown.
MSCI ACWI Small Cap vs. MSCI ACWI
However, at the end of the first quarter of 2020 global small caps had substantially underperformed large caps in the preceding five years. A favorable macroeconomic and earnings backdrop for small caps may indicate we are still early in the cycle of small caps outperforming large caps. Additionally, periods of small-cap outperformance have historically lasted several years.
MSCI ACWI Small Cap vs. MSCI ACWI
We believe the combination of less expensive valuations and faster expected earnings growth relative to large caps may continue to support global small caps in 2021.
MSCI ACWI Small Cap - MSCI ACWI
We are identifying small-cap companies that we believe will deliver accelerating and sustainable earnings growth across a broad array of regions and sectors. While optimistic, we continue to take a balanced approach to risks and opportunities at the stock and portfolio levels. In our view, it’s important to be both nimble and prudently diversified to navigate the volatility and uncertainty we expect to see through 2021.
We also think it’s important to consider a long-term strategic allocation to global small caps apart from any near-term tailwinds. We continue to believe global small caps are an inefficient asset class that may translate to strong alpha potential for well-resourced, disciplined and skilled active managers. In addition to the diversification benefits, in the examples below small caps have historically delivered superior long-term risk adjusted returns; they’ve consistently done so for investors with long-term time horizons (see charts below). For global small-cap investors, patience has typically been rewarded. Of course, past performance is no guarantee of future results.
MSCI ACWI Small Cap vs. MSCI ACWI: Percentage of Outperforming Time Periods
MSCI ACWI Small Cap vs. MSCI ACWI: Monthly Rolling Risk-Adjusted Returns
Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.
Diversification does not assure a profit nor does it protect against loss of principal.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
No offer of any security is made hereby. This material is provided for informational purposes only and does not constitute a recommendation of any investment strategy or product described herein. This material is directed to professional/institutional clients only and should not be relied upon by retail investors or the public. The content of this document has not been reviewed by any regulatory authority.