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洞见 27.03.2024

Four reasons to consider global SMID caps in 2024

Four reasons to consider global SMID caps in 2024

As the “Magnificent 7” generate risks in the segment, diversification within equities becomes key. Global small- and mid-cap (SMID) stocks, represented by the MSCI World SMID Cap Index, are emerging as a compelling option.

UBP’s expert Cédric Le Berre and our partner Ned Bell, CIO of Bell Asset Management, highlight four reasons why investors should take note.

First, with attractive valuations currently trading at a forward P/E ratio of 16.4x, global SMID caps present an enticing entry point, boasting a 10% discount to the MSCI World Index and a remarkable 39% discount to the MSCI World Large Cap Growth Index. Amidst concerns over high valuations, global SMID caps provide a relatively unscathed balance between fundamentals and valuations.

Second, global SMID caps show enhanced liquidity compared with pure small-cap stocks, making them worth considering for portfolio allocations. By diversifying across different market-cap tranches, investors can benefit from improved liquidity while maintaining strong EPS growth potential. Moreover, exposure to mid-cap companies often translates into superior environmental, social, and governance (ESG) ratings, adding further value to the investment proposition.

Third, global SMID-cap companies have demonstrated post-Covid resilience by significantly reducing leverage risks, with the net-debt-to-EBITDA ratio now standing at an acceptable level of 3.0. With most companies successfully managing high costs and inflation, the moderation expected in 2024 could serve as a positive catalyst for the asset class. Additionally, global SMID caps provide exposure to domestic US companies set to benefit from reshoring trends, aligning with the ongoing rhetoric surrounding the US presidential elections.

Fourth, there is no passive equivalent in the form of an ETF replicating the full global SMID-cap universe, which comprises over 5,000 stocks, unlike any other asset classes. This absence underscores the need for active management skills, making global SMID caps an ideal complement to passive equity investments and provides opportunities for skilled investors to capitalise on market inefficiencies.

In conclusion, investors have multiple reasons to consider incorporating global SMID caps into their portfolios for diversified and potentially rewarding returns, namely attractive valuations, robust EPS growth, high liquidity, healthy company balance sheets, and the absence of a passive equivalent.

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