The prospect of lower interest rates in the coming months is a favorable environment for small-cap stocks in Asia, although some risks to that trend remain, Bernstein wrote in a note.
Japan and some economies in the Association of Southeast Asian Nations (ASEAN) region have shown positive growth trends, reflecting a “good setup” for exposure to small or medium-sized companies, Bernstein said.
Bernstein noted that large-cap stocks have largely dominated the market gains seen in the U.S. and Asia over the past year. But the brokerage noted that even amid growing expectations of lower interest rates, there has been no sign of a broader rotation toward small-cap stocks in recent months.
Bernstein claimed that there was no broader shift towards small-cap companies across Asia, and that regional markets had shown an unusual performance in relation to this trend.
Japan is an outlier, with the Bank of Japan expected to start raising interest rates this year amid improving domestic economic conditions. Small- and mid-cap stocks with high exposure to domestic demand are expected to benefit, Bernstein said.
India is the only Asian market where small-cap companies have seen a relatively healthy amount of concentration, with near-term earnings remaining supportive of the trend, Bernstein said.
But the brokerage recommended more selectivity for small and mid-cap Indian companies and increased exposure to large-cap companies, citing a wide gap in valuations and overcrowding in investor positions.
With the exception of Australia, South Korea and parts of the ASEAN region, small-cap companies have generally performed better than their larger peers over a long period of time, Bernstein said.
On the earnings front, Bernstein said it continues to see earnings support for large-cap companies compared to small-cap companies across most of the region, except for China and ASEAN.
But globally, the brokerage still expects large-cap companies to continue to lead until there are more signs of macro and earnings support for smaller stocks.
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