Why I'm optimistic about small caps

Shares in small-cap companies rebound from recession faster than their large-cap siblings, according to research from data provider MSCI. That’s an encouraging thought. Sure, the prevalence of contradictory economic indicators means we may no longer be sure what actually is a recession; yet consensus opinion suggests that neither the UK – nor any country in the western world – is about to fall into one. That said, global economic growth was anaemic in 2022 and is set to be slower still this year and next (see the table). So there are recession-like features from which a recovery may ensue, starting sometime in, say, the coming 18 months; and – of course – barring the appearance of the unexpected and unwanted.

Hence some optimism about small-cap shares. MSCI’s analysts have trawled through US equity returns over the past 70 years, during which time the US economy has dropped into recession 11 times based on the familiar definition of a contraction in national output two quarters running. On every occasion in the 12 months following emergence from recession, US small-cap stocks have outperformed large caps, where the tiddlers comprise the smallest 30 per cent by stock market value and the big fish are the biggest 30 per cent.