(Bloomberg) -- With the final quarter of 2023 approaching, one winning strategy in emerging markets is becoming clearer: buying shares in smaller companies.Most Read from BloombergMGM Resorts Hackers Broke In After Tricking IT Service DeskUltra-Rich Buy Ultra-Luxury Counseling to Get Kids Into HarvardBillionaire Case Bets on Superfast Jet, AI Beyond Silicon ValleyCanada Postpones Trade Mission to India With Tensions On RiseErdogan Says Turkey, EU May ‘Part Ways’ After Critical ReportThe trade ha
The trade has produced an extra gain of 12 percentage points over the MSCI large-cap index so far this year, on course for the second-best relative returns in the past 14 years. Part of the reason is that large-cap companies are more likely to be exposed to China’s economic troubles.
The MSCI Emerging Markets Small Cap Index, which includes 1,905 stocks with an average market value of $583 million, is up 14.7% so far this year. That compares with a 2.5% gain in its large-cap counterpart, where the average size is $7.9 billion.Individual small stocks are producing some impressive returns: Taiwan’s Wistron Corp. and Global Unichip Corp. have soared 255% and 131% respectively this year, on the back of their links with artificial intelligence development.
But sky-high returns also mean enhanced risk for investors. Emerging-market small caps are notoriously volatile and are the first to be sold off when risk sentiment sours. They handed investors deep losses during the 2000 dot-com bust, 2008 financial crisis and 2018 US-China trade war, with the MSCI small-cap index underperforming its large-cap peer by about 30% on each of those occasions.
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