Analysts predict bounce back for global small caps & value stocks

Segments that have lagged in this year’s equities rally, most notably small caps and value stocks, are set for an imminent bounce back, according to analysis from European investment giant Amundi.

Amundi observed underlying shifts favouring these segments, noting particularly strong potential from US, Europe and emerging markets (EMs).

The analysts said their positive read was based on the economic backdrop and the earnings strength of companies in these geographies as well as corporate commentaries related to inflation, costs, and artificial intelligence (AI), among other factors.

While listed entities worldwide are benefiting from reduced inflationary pressures, according to Amundi analysts Barry Glavin, head of equity platform, and Yerlan Szdykov, global head of emerging markets, it will take time for the efficiency and productivity dividends of the artificial intelligence (AI) revolution to materialise for many businesses.

The pair note significant growth potential for equities in the EM space, “driven by the strong demand and economic growth” in these markets.

“Countries such as South Korea (corporate governance, dividend story), Indonesia and India should do well,” Glavin and Szdykov said.

On China, despite recent woes, the pair said they remain “vigilant”. Recent assurances from the Chinese Government to back its ailing real estate sector “are encouraging”, the analysts said, but the size of the support was relatively modest considering the problems facing the sector.

Brazil presents another opportunity in the LatAm region. However, the pair say they are conscious of Brazil’s fiscal issues.

In the US and global equities more broadly, the Amundi analysts predict a mild deceleration. As a result, they “remain cautious on the cyclical parts”.

“But we do not ignore quality businesses that are attractively priced.”

“For instance, we like select names in financials, energy, materials where business models are sustainable. In industrials, valuations are high and here we prefer the less cyclical areas. Overall, we seek to minimise our risks on macro factors by identifying idiosyncratic risks.

In Europe, where analysts overall remain cautious of Europe’s sluggish growth, Amundi said it favours “good quality businesses with attractive valuations”. Amundi said it remains driven by secular themes.

“At a sector level, we are positive on consumer staples (slightly less than before) and healthcare,”.

Though the analysts expressed caution around Europe’s technology sector.

“Across European equities our barbell stance towards defensive and cyclical sectors is maintained,” the pair added.

“Overall, we think cyclicals are expensive vs. defensive, and earnings do not support this premium.”