(Bloomberg) — With the final quarter of 2023 approaching, one winning strategy in emerging markets is becoming clearer: buying shares in smaller companies.
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The trade has produced an extra gain of 12 percentage points over the MSCI large-cap index so far this year, on course for the second-best relative returns in the past 14 years. Part of the reason is that large-cap companies are more likely to be exposed to China’s economic troubles.
Small-caps, on the other hand, are benefiting from local growth stories such as India’s as well as the craze for investing in young companies in artificial intelligence and electric vehicles.
“Small caps in EM have rallied relative to the large caps since the end of the Covid drawdown, in line with previous historical instances when small outperforms large coming out of recessions,” said Jitania Kandhari, deputy chief investment officer at Morgan Stanley Investment Management, which has more than $1 trillion in assets under management. “Strong domestic recovery cycles drove the initial outperformance and the underperformance of the mega-caps has driven it further.
The MSCI Emerging Markets Small Cap Index, which includes 1,905 stocks with an average market value of $583 million, is up 14.7% so far this year. That compares with a 2.5% gain in its large-cap counterpart, where the average size is $7.9 billion.
Individual small stocks are producing some impressive returns: Taiwan’s Wistron Corp. and Global Unichip Corp. have soared 255% and 131% respectively this year, on the back of their links with artificial intelligence development. Stocks like Jindal Stainless Ltd. and Rail Vikas Nigam Ltd. are at least 100% higher, riding India’s economic growth, the fastest among major economies.
South Korea’s Ecopro BM Co. notched the best gains on the Bloomberg Electric Vehicles Index, up 204%. Brazilian education company Yduqs Participacoes SA has soared 103%, rewarding investors who had bet on its turnaround from a post-Covid slump with an emphasis on digital revenue.