JPMorgan Asset doesn't think outperformance of Asian smallcaps will last

By Moxy Ying

Asia’s smaller stocks have been beating their larger peers recently on the shift to value investing, but whether this will last depends on a resolution on trade, according to JPMorgan Asset Management.

The MSCI Asia Pacific Small Cap Index is on track to beat its large cap counterpart for the first time in six quarters, with a gain of 0.4 per cent so far this quarter. The large cap gauge is down 0.6 per cent since the end of June.


The main factor has been the rotation into value stocks in the broader market this month, said Joanna Kwok, who manages JPMorgan Asian Smaller Companies Fund, which has beaten 96 per cent of its peers year-to-date, according to Bloomberg-compiled data.

“For Hong Kong, it’s a rotation to value and there is plenty of value in Hong Kong small caps,” Kwok said. “For Taiwan, there has been a recovery in the technology sector, many of which are momentum names. For India, it is because of the Indian government stimulus (tax cuts last Friday) which gave a sentiment boost.”

Sustained outperformance for small caps would require a “sudden unexpected resolution” to the global trade war and a continued rally in cyclical value stocks in broader market, Kwok wrote in an email, adding stock selection is key in the small cap space in Asia. This might be a tall order given the on-again-off-again nature of the U.S.-China talks and signs that the relative strength of Asia’s value stocks may be starting to falter.

“If global growth is slowing, while inflationary pressure remains benign in the region, and with valuation near average level, we would expect small caps to be at best in line with large caps,” Kwok said.