2020 Outlook: Non-US Small-Cap Equity

Timely insights from portfolio managers and industry experts on key financial, economic and political issues.

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness.

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      By Aidan FarrellDirector of Global Small Cap Equity, Eaton Vance Advisers International Ltd.

      London - There's no question that the world is concerned about a slow Japan-style economic outlook. From my perspective, in terms of non-US small-cap investing, that's not a headwind in any way.


      Relative small cap performance in a slow growth environment

      The evidence is there, if we look at the returns from small cap Japanese equities over the last 20 years. That's a period when Japan has had low interest rates, low government bond yields and pretty low GDP growth rates, and struggled to get growth going. Yet even in a slow growth economy, we believe small cap investing can be successful.

      Some investors are questioning the validity of whether small caps can continue to outperform large caps, as they've done over the last 10, 15 or 20 years. Right now, we're going through a cyclical slowdown, largely because of international geopolitical tensions between China and the US — and indeed, Brexit.

      Reasons to invest in small caps

      Nevertheless, there are evergreen reasons why I feel that small cap investing can continue to bear fruit for investors. One reason is the opportunity set — the sheer breadth of the small cap marketplace. Another is that mergers and acquisitions (M&A) tend to be a tailwind for small cap stocks over time. There's also the inefficiency argument: Far fewer people are looking at small caps than large caps from the analytical side.

      When it comes to valuations versus earnings now, the argument may not be as compelling as it was a year ago. We saw a very good recovery in 2019, and valuations are back to their average levels over the last five years. And there's no question that earnings estimates are now under pressure because of geopolitical tensions.

      Bottom line: Valuations and earnings are a focus of investors in the very near term — particularly in relation to small cap stocks, and also large caps. But we think the evergreen benefits of small cap investing will continue to bear out as the global economy improves.