A lack of liquidity had greatly hurt small caps during the onset of the financial crisis. But they’re seeing a turnaround now. Last month, we said small caps were leading the market. Investors have realised that these stocks are greatly undervalued - and they’re waking up to the potential profits to be made from this sector.
The chart below shows the FTSE Small Cap Index (red line) versus the FTSE 100 (dark green line) for the year-to-date. Small caps have more-than-doubled the performance of the broader market over the past two months. They’ve gained 27% since April, while the FTSE 100 has shown only a 10% rise for the same period.
Strong ground - small caps are in a good position at the moment
Source: Financial Times
Small caps typically provide a higher rate of return than large caps, compensating for the higher risk in investing in small firms. Harry Nimmo, manager of Standard Life's UK smaller companies fund, sees smaller British companies continuing to lead the market higher as investor confidence rises.
Other experts also observe that buyers are coming in for small caps - and there are few sellers, so the prices keep on being marked up.
While it’s early days yet to call a return of the bull market, the upturn among smaller companies looks very promising indeed. So long as investors’ current appetite for risk doesn’t disappear, small caps are likely to keep growing in strength.
Editor’s note: Small cap expert Tom Bulford has some straightforward rules to reveal, in helping you scope out the small firms reaping big rewards. To find out how the "Mattress Syndrome" could bank you gains of 86% by April 2010, click here.
Forecasts are not a reliable indicator of future results. Your capital is at risk when you invest in shares, never risk more than you can afford to lose.
P.S. If you enjoyed this article you can find out more about our free email, The Right Side by clicking here.
