Bet against the tide: struggling small, midcaps poised for comeback
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BET AGAINST THE TIDE: STRUGGLING SMALL, MIDCAPS SET FOR COMEBACK
Even as big money continues to fly out of small- and mid-cap (SMid) assets across the globe, strategists at J.P.Morgan believe the sagging asset class's exposure to active funds could open up the door to strong returns.
"SMid (portfolio managers) should continue to deliver more alpha than their large-cap peers for the foreseeable future given our view that SMid remains an asset class that is better suited than large-caps for active management," the strategists noted.
Small- and mid-caps are less exposed to passive flows, somewhat keeping alive their scope for sporadic strong returns. On the other hand, large caps that command a lion's share of passive funds are witnessing increasing volatility, worsening their risk-adjusted returns.
Active funds can be associated with higher returns, a function of higher costs and risks, while passive funds are known for offering steady, long-term returns at lower costs with market-level risks.
In general, small- and mid-cap stocks are also expected to fare better as concerns over a likely U.S. recession have started to ease in light of improving economic data coupled with an all but certain interest rate cut by the Federal Reserve in September.
Institutional investors have been heavily under-invested in small- and mid-caps. 2024 is on track for the third straight year of outflows for the assets in developed markets, sharply underperforming their large-cap peers.
So far this year, the MSCI small-cap .dMIWO000S0GUS and mid-cap indexes .dMIWO000M0NUS are up 9% and 10%, respectively, falling short of the near 20% jump seen in the large-cap index .MIWO000LGPUS.
Even though a global phenomenon, Europe and the UK have been the worst hit, logging their worst cumulative outflows over the last two and a half years since the Great Financial Crisis.
(Ankika Biswas)
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Smid vs L https://tmsnrt.rs/4dFa0sj
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