Asian Small-Caps, Late to the Rotation Party, Start Winning Fans

(Bloomberg) -- After three years out of favor, Asia’s small caps are finally winning some fans.

Bulls like Aberdeen Standard Investments and UBS Group AG say that tiny stocks could be a good bet on a post-pandemic economic recovery, especially as these shares haven’t benefited as much as their larger peers in the rotation into beaten-down stocks this month.

Small caps are where the “most attractive” investments in emerging Asian markets can be found, said Hugh Young, head of Asia Pacific at Aberdeen.

Small-cap shares have lagged their larger cohort in Asia for nine straight weeks and are poised to finish 2020 underperforming for a third year. That’s because many of the outperformers during the pandemic globally have been the big technology, health care and consumer-staple stocks.

Stocks linked to “a post-Covid world where personal tech dominates and anything that can improve productivity in a WFH world” can especially benefit, said Olivier d’Assier, Head of Applied Research at Qontigo GmbH.

He noted, however, that small caps could trade sideways in the remainder of this year given uncertainties like a chaotic transition of power in the U.S. and a pick-up in Covid-19 infections in the winter.

Analysts have already been revising up 12-month earnings forecasts of small stocks, raising those for MSCI Asia Pacific Small Cap Index by 14% over the course of the second half of the year. That’s more than the 12% increase they did for the MSCI Asia Pacific Index companies, according to data compiled by Bloomberg. The small-cap gauge rose 2.1% last week, slightly lagging the large-cap one.

Aberdeen’s Young said in a Bloomberg Television interview this week that Taiwan’s e-commerce company Momo.com and Sri Lankan conglomerate John Keells are among his small-cap picks.

Grace Yan, the fund manager of the Nikko AM Asian Small Mid Equity Fund said she found more opportunities in South Korea given that an overhang has been removed after the government recently scrapped plans for new capital gains taxes.

Mothers Momentum

Japan’s smaller stocks offer opportunities even though Tokyo Stock Exchange Mothers Index is up more than 30% in 2020, far outperforming the country’s broader equity measures after two years of underperformance. Yet fewer than half of Mothers-listed names are in the green for the year, with pandemic beneficiaries among the biggest drivers.

Yutaka Yoshino, chief technical analyst at SMBC Nikko Securities Inc., expects Mothers to continue to climb next year. “Small caps tend to repeatedly alternate between sharp growth and stagnation in three-year cycles, and we expect an upward wave to gain momentum from January 2021,” he wrote in an Oct. 28 report.

The bets on Asian small caps come as some Wall Street firms turn optimistic on tiny stocks globally.

Investors have a “ particular catch-up opportunity in small- to mid-cap stocks as economic normality starts to return,” said Mark Haefele, chief investment officer of UBS’s wealth management arm.

©2020 Bloomberg L.P.