A similar pattern has been observed in the Eurozone and in the US. After strong small and mid-capitalisation returns in 2013, why has this happened and is it all over for this part of the market?
A number of factors seem to be at work. First is a reaction to the strong returns seen last year, with momentum investors unwinding positions in small and growth companies.
Second, valuations were elevated versus large companies.
Finally, weak economic data out of the US and Eurozone in the first quarter may have raised questions about the prospects for more domestically–oriented companies. Bid activity in the pharmaceutical industry on both sides of the Atlantic has lifted the large capitalisation indices and falling bond yields and geopolitical concerns have stimulated a desire for more bond-like, large capitalisation, higher yielding names.
We have meaningful exposures to mid and smaller companies. Some of this is gained through targeted passive vehicles, some through active managers with a particular focus.
These positions have performed better than their underlying indices in 2013 and year to date. While constantly reassessing our views, we remain confident in the extent of our small and mid-capitalisation bias.
We expect an improvement in the growth picture in several key developed economies as we move through the summer, helped by accommodative central bank policy.
This directly benefits companies active in their domestic economies. At the same time there is some evidence to suggest that those over-exposed to this part of the markets have unwound their positions, which should prove supportive.
