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The Case for Global Small Caps Is Strengthening

by: Lawrence Hamtil     

It has been widely-discussed that 2017 was the first year in quite some time that just about every major region outperformed the U.S. equity markets, at least when measured in dollar terms.  What has been less discussed, however, is that global small cap stocks, - whether in Japan, Asia, Europe, or emerging markets, - outperformed small cap U.S. stocks by an even greater margin.  In fact, you would have to go back to 2005 to see such strong and widespread performance for non-U.S. small caps relative to U.S. small caps:

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The performance of small cap stocks are typically more closely aligned with their parent economies, and given that last year was a breakout year of sorts for the global economy, the strong performance of small cap stocks worldwide should not be surprising.  Furthermore, as we discussed last May, foreign small cap stocks have the advantage of being far more diversified across sectors and industries than their large cap counterparts, so, in aggregate, they offer investors more balanced exposure to the parent economies.

Another key advantage to broader sector and industry exposure is that the relative cheapness of foreign small caps relative to U.S. small caps is less a product of aggregation bias, and therefore more likely indicative of real, versus merely apparent, value.  It is important to note that despite 2017's surge in global small cap stocks, all major regions still boast higher dividend yields and lower earnings multiples than U.S. small caps:

Finally, foreign small cap stocks have offered investors better diversification benefits than foreign large caps, which is critical in a time of somewhat elevated correlations across the globe.  As the global economy continues to improve, a combination of an improved earnings outlook and favorable valuations should continue to boost the case for exposure to foreign small caps.

The information provided above is obtained from publicly available sources and it is believed to be reliable. However, no representation or warranty is made as to its accuracy or completeness.

Lawrence Hamtil is a fourteen-year veteran of the financial services industry, having served clients in all aspects of the business during his career, which started in 2002. In 2005, he joined Dennis Wallace of Fortune Financial Services, LLC, becoming, at the time, one of Multi-Financial Securities, Inc's youngest registered representatives. In 2008, Dennis and Lawrence made the decision to become fully independent by founding their own Registered Investment Advisory (RIA), Fortune Financial Advisors, LLC. He serves clients in the United States and Europe. His financial commentary has been referenced in Barron’s online edition.

You can connect with Lawrence on Twitter ( @lhamtil) or via email, lawrence.hamtil@fortuneadv.com.