#NOW IS THE TIME FOR MICRO CAP STOCKS DRIVER#

However lingering deflation and solvency risks could lead to nasty air pockets in the near to medium term. The current level of stock dispersion among global small caps relative to large caps suggests an even greater alpha opportunity for active managers.

Bottom line - Global small caps (and value stocks) are poised to benefit from powerful cyclical and secular tail winds.

In China and other countries that are ahead of the US in containing the virus, lingering concerns about public health risks have significantly limited householdsвЂ™ desire to restart spending again as consumers remain concerned about catching COVID-19, and apprehensive about their incomes. With rates already at rock bottom levels, it is unclear whether households will ramp up discretionary spending activity, even if their incomes have been sustained by fiscal support.

#NOW IS THE TIME FOR MICRO CAP STOCKS DRIVER#

A key driver of their underperformance has been the expanding deflationary fears engulfing the global economy. Cyclical stocks have underperformed defensive equities by their greatest extent since the great recession of 2008.

However, both solvency and deflationary concerns associated with COVID-19 uncertainty could undermine a durable rally in global small cap stocks in the near-to-medium term future.

European small caps generate 85% of their revenues domestically vs. Small cap stocks are by their very nature domestic, especially in Europe.

COVID-19вЂ™s likely acceleration of de-globalization would be expected to impair mega-cap companies that have most benefitted from global supply chains and customers.

M&A activity could turbo charge the performance of small cap stocks that tend to be the вЂњtargetsвЂќ and enjoy a bid premium.

Small cap stocks are attractively valued.

In light of the extraordinary global policy support to combat the economic fallout from COVID-19, small cap stocks should therefore disproportionately benefit from a cyclical rally.

International small cap stocksвЂ™ greater exposure to cyclical sectors ( Table 1), has historically boosted their performance during post-recession, early cycle rallies, whereas large cap international stocks typically outperform in late expansion markets, such as mid-2007 to mid-2008 during the GFC, and from early 2018 until now.

One way of measuring the opportunity for stock selection is through stock return dispersion, which currently is at a secular high ( Chart 3). Moreover, we have long maintained that high active share strategies are best deployed in less efficient market segments such as global small cap stocks, which are not as widely covered as large cap stocks by research analysts.

Small caps have enjoyed a structural size premium ( Chart 1 and Chart 2).

Environmental, Social, Governance (ESG).

International Small Cap Equity Strategy.

Now is the time for micro cap stocks