Small-cap stocks have been incredibly popular and have consistently delivered very promising results. Powerful results have been delivered by small companies this year. There are, in fact, several reasons for the projection of small-cap companies in the prevailing market conditions which include tax regimes as well, as you shall soon see.
Why Are Small-Caps Rising?
First off, the larger enterprises show great eagerness when it comes to acquiring small firms. In fact, the global merger and acquisition activity rose by 57% to a figure of $2.49 trillion. This is the highest level reached since the first half of the year 2007.
Small companies are increasingly becoming the objects of interests according to Greg Wendt. He is an analyst and portfolio manager at Capital Group.
But what exactly distinguishes small-cap firms from the others? This is exactly what sets them apart and gives them a strategic edge. Small-company shares do not rely as much on global trade and hence resulted in better results than the small-caps globally and the large caps in the US. According to Wendt, “They are more protected from the trade rhetoric.”
Let’s consider the market dynamics in greater detail to better understand the reason for the rise of small-caps. The small US companies will earn nearly 80% of their revenue domestically. This is in stark contrast to the 60% revenue that arrives from the domestic market for the large companies. It may be noted that the firms with market caps below $6 billion are considered small-cap firms according to Capital Group in this context.
Tax reform is another factor. Smaller companies benefit from lower tax rates since they pay higher tax rates than large firms. According to Wendt, the large enterprises are able to keep their tax rates low because they shift their cash to other nations with friendlier tax laws.
Peter Eliot who is a portfolio manager at Capital Group is of the opinion, “By turning over a lot of rocks, we have managed to find several excellent companies early in their life cycles.”
It is important to consider whether the investors will be able to benefit from the long-term opportunities in this sector.
In addition, he said, “We look for young companies with large market opportunities, outstanding management teams and high-quality businesses and then follow them closely as they grow.”
It is important to adopt a strategic approach when it comes to investing. Have allocations to small-cap stocks. This is essential for a diversified portfolio.
According to Wendt, “The way you protect yourself from the volatility is to be a long-term investor with at least a 10-year horizon.”
Also, it is important for investors to be selective as well. Look out for small companies that have the potential to bloom. Furthermore, small-caps suffer from volatility to a greater extent but are essential for a diversified portfolio.