The IMF has forecast the global economy will grow 3.5% in 2017. Likewise, in the year to date, markets have acheived high growth rates.
Since the start of 2017, with returns of around 13% (compared with 2% in 2016), world markets are showing signs of a recovery. Against this positive backdrop, UBP’s analysts keep in mind small and mid caps as an investment option. Cédric Le Berre, product specialist at the house, has analysed the reasons for investing in companies with these characteristics.
“Small and mid cap firms have shown a very high growth potential and their results back this up. Furthermore, they have an important component which differentiates them from the big companies: innovation”. Analysts tend to cover this sector less, but it has interesting investment opportunities,” says Le Berre.
His reasons are the following:
1.-They are indispensable for a balanced investment strategy: if we analyse the European small & mid caps’ yields since 2000 and compare them with those of the MSCI Europe index, the former have been higher and continue to show potential in the year to date.
These companies have great growth potential which is worth taking advantage of with a balanced and well-defined investment strategy. The solid earnings growth of the small and mid caps in relation to that of the bigger firms isfairly encouraging. For this reason we recommend investing in this type of company, which we believe is a good option to include in portfolios,” Cédric Le Berre says.
2.-Innovation is the key to success: various small and mid cap companies focus on innovation, much more so than larger companies, which to a certain extent guarantees high growth rates. For Le Berre “a company which is constantly changing, more easily adapts to the market’s swings, allowing it to obtain interesting returns.” As the emerging markets mature and sectors like technology and automotive begin to take off there, the small and mid caps will assume a role which goes far beyond that of infrastructure firms. In Switzerland for example, these companies offer stability with an indirect exposure to emerging markets and, as a result, they can benefit from the latter’s future growth.
3.-The cut in US corporation tax: the US economy has continued to grow during the second quarter of the year, on expectations of a recovery in the manufacturing industry and an uptick in domestic consumption. The cut in corporation tax could have a positive impact in the long-term on US firms, favouring those which obtain most of their profits from their domestic business. In this context, there are some key points related to small caps: a 15% decrease in corporation tax should be particularly beneficial for the small caps given that, currently, they pay more tax than the big firms.
“This is an aspect to take into account when evaluating an investment in some small caps in that country. These firms tend to grow organically in line with the domestic market, given their greater sensitivity to the economic cycle. So it’s very likely that the small caps demonstrate a positive correlation with the US’ economic development. We are convinced that the small caps in the US will continue to show potential, especially in the financial and more cyclical sectors,” Le Berre highlights.
4.-High return on investment: after a brief respite during the financial crisis, small and medium capitalization companies have recovered their returns previous to 2008 and have surpassed those of the big companies.
Cédric Le Berre says that:
“The data show that these kind of companies will continue to grow faster than large companies. Furthermore, the fact that small and mid caps have an entrepreneurial mindset allows capital to remain in the hands of family members and investments are aligned with the spirit of the founder. This ensures a certain continuity in the company and returns worthy of consideration “.