As investors in small and microcap companies are all too aware, UK smaller companies experienced their worst relative drawdown for more than two decades after the market peaked in September 2021.
In the subsequent 25-month period to the market low in October 2023, the Numis Small-cap and Aim Total Return (TR) index (excluding investment trusts) underperformed the All-Share TR index by 38 per cent. It was not just a UK phenomenon, as research from River UK Micro Cap (RMMC) highlights relative underperformance of large caps in most developed economies including Europe, Japan and the US.
Bearing this in mind, research from Kepler Chevreux shows that the “first cut in official bank rates typically coincides with the start of a period of outperformance of small versus large caps”. The turning points for performance in 1999, 2007 and 2019 were all aligned with central bank rate cuts. For instance, the cycle of US rate rises from 2016 to 2018 ended when rates were cut in July 2019. UK small caps underperformed by 16 per cent from September 2015 to July 2019. Interestingly, the small-cap cycle started six months ahead of the first rate cut for the dot-com cycle, which UK River Micro Cap Fund believes is the one most similar to today.