Spotlight: Big opportunities with small companies

Sharply rising inflation rates, restrictive central bank policies, recession fears, the war in Ukraine, and a possible energy crisis led to (in some cases significant) losses for most asset classes in the calendar year 2022. Within equity markets, high-quality growth companies as well as small and micro caps were hit over-proportionally. Rel-ative to the overall market and to large public companies, small and micro caps ex-perienced historic losses – in fact, the heaviest losses since the turn of the millen-nium. Taking Europe as an example, European small caps underperformed large caps by more than 20 percentage points (time period: 31st December, 2021 – 30th December, 2022) – a drawdown more severe than during the 2008 financial crisis. But also globally small caps came under considerably more pressure than their large cap counterparts – in some geographies this phenomenon set in even earlier than in Europe.

In this Spotlight, we put this drawdown of small caps and their valuation into his-torical context and highlight the long-term benefits of an allocation to small caps. We take a look at the past and show that small and micro cap performance regularly preludes the business cycle. Investors should not wait too long to enter the market after major setbacks, as when the economy is starting to improve again, the market has long since priced in the better outlook.