Allocating to global SMID caps now is worth considering for two reasons. First because the high potential of the asset class usually transpires during recovery periods. History seems to be repeating itself, as global SMID caps have been outpacing other equity segments since the March 2020 drawdown, a pattern that has been observed before – following the dot-com bubble and the global financial crisis.
Additionally, and against a backdrop of depressed earnings for 2020, global SMID caps are offering better earnings leverage and attractive valuations by trading at a much lower P/E ratio than large-cap growth stocks. In the currently expensive market, SMID caps are probably one of the last areas within equities where the balance between fundamentals and pricing remains relatively unscathed.
With the combination of corporate cost-cutting, COVID-19-related stimulus packages and the reopening of global economies, the prospects for SMID-cap businesses look exciting. In order to extract the most potential out of this large ecosystem, investors should select companies that are:
- Based in developed markets, which offer stability and a diverse array of sector expertise
- Strongly ‘quality’-oriented, as defined by factors like return on assets and equity, operational and net margins, and long-term debt to capital
- Highly liquid, within an indicative market-cap range of USD 1–35 billion