Foreign small cap growth stocks have been negatively impacted by the rising rate environment more than any other segment of the global equity market. In fact, the correlation between foreign small cap growth stocks and US interest rates is close to 1.0 since 2022.
As a result, foreign small and mid-cap growth stocks have meaningfully underperformed the rest of the market.
The underperformance has caused investors to redeem out of foreign small and mid cap growth-oriented funds at record pace.
The underperformance coupled with relatively stable earnings growth has driven foreign smid cap growth to trade well below its 30% average valuation premium to US large caps. In fact, it now trades at a discount to US large caps for the first time in over two decades.
The last time foreign smid cap growth traded at a discount to US large caps was in 2003. From May 2003 to December 2004, the 30% valuation premium was restored, and foreign smid cap outperformed US large cap by nearly 40%. But it didn’t stop there. It continued to outperform. By the end of 2007, foreign smid cap growth stocks outperformed US large caps by 130%.
It’s been over 20 years since foreign small cap growth offered investors such attractive relative value and may be another 20 years before we see an opportunity like this again. We believe it’s time investors appreciated the value in foreign small cap growth.
Sources: Morningstar, Factset, 1998-2024
This post is for information and educational purposes only and expresses our opinion and view of the market and is not a recommendation to transact in any securities.
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