Amid trade conflicts affecting investor sentiment for the broader Asian equities, investors should consider looking at small-cap companies in the region given their resilience and abilities to weather volatility caused by external factors.
This is particularly true for companies whose businesses are regionally or domestically focused and are relatively insulated from external factors.
The MSCI Asia Pacific ex Japan Small Cap Index, for example, has gone up nearly three times from October 2008 through mid-September this year.
During this time period, the Asian small-cap companies have gone through many adverse market events, Elizabeth Soon, Hong Kong-based portfolio manager and head of Asia ex-Japan equities at PineBridge, wrote in a note.
This include the global financial crisis, geopolitical crises, and China-related issues in 2011 and 2015.
Yet, some Asian small-cap stocks have returned between 20% and 30% on a compounded basis during this period.
‘In the ongoing trade friction, we are seeing a structural shift where companies are moving to other developing countries in the region, which could help Asia’s overall development,’ Soon said.
‘Indeed, on the ground, we are seeing increasing foreign investment enquiries and activities in Southeast Asia, and we will continue to monitor this trend,’ she added.
What’s more, the valuations of Asian small-cap companies have come down significantly.
Though the prices of these companies have either come down or not moved, the value of the underlying businesses measured by company earnings has appreciated, Soon said.
‘This price-value gap will eventually correct, and investors, especially those who are going to be net savers for a long time, could use this near-term negative sentiment to increase their allocations to equity,’ she added.
Meanwhile, innovation, a growing middle class, and urbanization continue to cultivate fertile soil for small-cap companies that have yet to fully bloom in Asia.
Within the Asia ex Japan region, 90% of all listed corporations – about 15,000 – are small-cap.