(Bloomberg) -- Asia’s smaller stocks have been beating their larger peers recently on the shift to investing, but whether this will last depends on a resolution on trade, according to JPMorgan Asset Management.
The MSCI Asia Pacific Small Cap Index is on track to beat its large cap counterpart for the first time in six quarters, with a gain of 0.4% so far this quarter. The large cap gauge is down 0.6% since the end of June.
The main factor has been the rotation into stocks in the broader market this month, said Joanna Kwok, who manages JPMorgan Asian Smaller Companies Fund, which has beaten 96% of its peers year-to-date, according to Bloomberg-compiled data.
“For Hong Kong, it’s a rotation to and there is plenty of in Hong Kong small caps,” Kwok said. “For Taiwan, there has been a recovery in the technology sector, many of which are momentum names. For India, it is because of the Indian government stimulus (tax cuts last Friday) which gave a sentiment boost.”
Sustained outperformance for small caps would require a “sudden unexpected resolution” to the global trade war and a continued rally in cyclical stocks in broader market, Kwok wrote in an email, adding stock selection is key in the small cap space in Asia. This might be a tall order given the on-again-off-again nature of the U.S.-China talks and signs that the relative strength of Asia’s stocks may be starting to falter.
“If global growth is slowing, while inflationary pressure remains benign in the region, and with valuation near average level, we would expect small caps to be at best in line with large caps,” Kwok said.
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