International small-cap stocks set for a rebound with tech leading the way

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Kabouter Management’s Nikhil Rastogi says there’s a ‘very high chance’ small caps will outperform other sectors because of high-quality companies persevering during tough times

Since 2022, global non-U.S. small-cap stocks have had a rough ride falling 7 per cent in 2022 and 11 per cent in the first half of 2023 compared with large-cap stocks. While this decline is historic, Nikhil Rastogi, a portfolio manager with Kabouter Management LLC, says the last time there was such a big drop, it was followed by a sharp rise.

Small caps underperform when the economic environment is challenged because small-cap companies tend to be less diversified in terms of exposure to different regions and products. Sometimes, they have too much dependency on one customer. When economic headwinds are high, like they are now, these companies see a bigger impact on their earnings. Also, investors also move capital to large caps from small caps because of perceived safety. These two factors lead to the underperformance of small caps.

 

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