A global rally, led by the UK, Europe and Asia ex Japan
Small caps have outpaced large caps across nearly every major region. In the UK, the MSCI UK Smaller Cap Index returned 12.7% since the start of April, compared to just 3.0% for the broader MSCI UK Index. Europe saw a similar pattern, with small caps up 9.9% versus 2.7% for large caps. Asia ex Japan small caps delivered a striking 18.1%, well ahead of the 12.7% return from their large-cap counterparts.
Even in the US – where mega-cap tech stocks dominate headlines – small caps held their own. The Russell 2000 rose 10.8%, nearly matching the S&P 500’s 10.9% gain.
More than a short-term bounce
Small-cap strength isn’t new. In Asia ex Japan, small caps have outperformed over five and ten years. In Europe, the MSCI Europe Small Cap Index has delivered 5.9% annualised over 15 years, compared to just 1.8% for the broader index.
Why we think the trend has legs
Several factors support the case for continued small-cap outperformance:
- Diversification: Small caps offer exposure to different economic drivers, especially outside the US. With US large caps heavily owned and policy uncertainty rising, geographic diversification is becoming more attractive.
- Domestic focus: Smaller companies tend to be more locally oriented, making them less vulnerable to global trade tensions and currency swings.
- Favourable policy backdrop: Interest rate cuts in developed markets typically benefit small caps more than large caps. Meanwhile, corporate reforms in Japan and fiscal stimulus in Germany are boosting local economic growth prospects.
- Valuations: Small caps are trading at their widest discount to large caps in over two decades – an opportunity that hasn’t gone unnoticed by value-focused investors.
- Earnings potential: Forecast earnings growth for the ACWI Small Cap Index is currently higher than for large-cap indices.
What this means for investors
The case for small caps is building. Investors looking to diversify away from US mega-caps may find compelling opportunities in smaller companies across the US, Europe and Asia ex Japan. Active managers with local expertise could be well placed to navigate this space.
Here are a few companies that we think typify the compelling small-cap opportunity.
In Europe, there’s leading ticket and live entertainment business, Eventim. This is a high-quality, founder-led company with a strong balance sheet and a proven track record. It successfully navigated the challenges of COVID-19 and emerged stronger. Demand for live entertainment continues to rise, driven in part by major artists – from Taylor Swift to Oasis – returning to touring as streaming erodes traditional record royalties. These structural tailwinds should support long-term demand for Eventim’s services.
Paragon is a UK specialist finance provider focused on buy-to-let lending for professional landlords and commercial borrowers. It boasts robust credit credentials and a well-diversified balance sheet, supported by both wholesale and retail funding. The business is conservatively managed by an experienced team with deep expertise across market cycles. Its disciplined lending standards and market-leading position help it avoid risky growth strategies, while strong customer insights reduce impairments and support consistent financial returns.
Over in the US, we have Boot Barn, a dominant player in the large and growing US western and workwear retail market. It has delivered consistent mid-teens revenue growth over the past decade, driven by acquisitions, new store openings and strong same-store sales. The company has expanded margins and built customer loyalty through exclusive brands and a balanced mix of fashion and functional apparel. With limited competition and pricing power, we think Boot Barn should continue to ride high for many years to come.
Often dubbed the “Chinese Spotify,” NetEase Cloud Music is the country’s second-largest music streaming platform. The company became more competitive in 2023 following a successful pivot to live streaming. It is benefiting from rising affluence in China, with music lovers spending a growing share of their disposable income on online entertainment. NetEase enjoys strong youth engagement and a strategic partnership with Alibaba’s 88VIP loyalty programme. This demographic appeal supports its long-term earnings potential, while its advanced recommendation engine and enhanced user experience reinforce pricing power and customer loyalty.
Final thoughts…
Trump’s ‘Liberation Day’ may have sparked the latest rally, but the forces driving small-cap outperformance run deeper. With attractive valuations, improving fundamentals and a supportive macro backdrop, global small caps could be entering a new phase of leadership. For investors, it might be time to think small to go big.
Source of stats: Morningstar 09.07.10 - 08.07.25
Companies are selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.