By Maroun Younes, Portfolio Manager, Fidelity Global Future Leaders strategies
Large-cap companies like those in the Magnificent 7 have dominated headlines. But why is taking a position in an asset class like global small to mid-caps beneficial for investors, right now?
In the ever-evolving landscape of global investments, the strategic allocation to small and mid-cap stocks is increasingly being recognised as a valuable complement to large and mega-cap stocks. The rationale behind this approach is multifaceted, focusing on valuation, diversification, and resilience in the face of global trade frictions.
Valuation perspective
One of the most compelling reasons to consider small and mid-cap stocks is their current valuation. Large cap stocks are presently trading at valuation peaks, making them less attractive from a price perspective. In contrast, small and mid-cap stocks are trading at valuation multiples that are closely aligned with their long-term historical averages. This suggests that investors can achieve diversification and capitalise on more appealing valuation opportunities by shifting their focus to the small and mid-cap segment.
Diversification across industries and sectors
Another critical advantage of small and mid-cap stocks is the diversification they offer across various industries and sectors. Unlike large and mega-cap stocks, which tend to be heavily concentrated in the technology sector, small and mid-cap stocks span a broader array of industries. This diversification is beneficial as it reduces dependency on any single sector and provides exposure to different business models and growth opportunities. Investors can thus achieve a balanced portfolio that mitigates sector-specific risks while still tapping into attractive growth prospects.
Resilience in global trade frictions
In a world where global trade is increasingly characterised by friction, small and mid-cap stocks offer a strategic advantage. With the rise of tariffs and the potential for trade wars, globally dominant large cap companies face significant challenges due to their extensive international operations. These companies are often entangled in various trade disputes, making it difficult for them to navigate and evade tariffs.
On the other hand, small and mid-cap companies tend to be more domestically focused, allowing them to circumvent the complexities of global trade frictions more effectively. This domestic orientation can insulate these businesses from the adverse impacts of international trade barriers, providing a layer of protection in an uncertain global trade environment.
In summary, the allocation to global small and mid-cap stocks presents a compelling case for investors seeking diversification, attractive valuations, and resilience against global trade frictions. By integrating these stocks into a portfolio, investors can potentially achieve a more balanced investment strategy that is well-positioned to navigate the complexities of today’s global market.
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