Cheap valuations and a bias toward economically-sensitive sectors are why investors in developing country markets are choosing to bet on small, according to Manishi Raychaudhuri, BNP Paribas SA’s head of APAC equity research.
“Cyclicals -– particularly commodities — have largely led earnings estimate upgrades since early 2021,” Raychaudhuri said. “In early 2021, the EM small cap index was significantly cheaper than the MSCI Emerging Markets Index, and it still remains cheaper.”
Still, the outperformance of EM smallcaps is expected to slow down in the medium term, said Raychaudhuri.
“During the initial phases of Federal Reserve’s monetary policy normalization, EM stocks usually underperform and the high beta smallcap stocks could underperform more than the frontline large caps,” he said.