How Do Small Caps Fit into a Deglobalized World?

In a recent blog post, we explored how investors could identify potential beneficiaries of global supply-chain realignment using MSCI Economic Exposure data. Relying on the same dataset, we have gauged how small companies around the world could be impacted by deglobalization. Our approach assesses the proportion of a company’s revenues that were generated domestically, as of Sept. 29, 2023.

Small caps in developed markets (DM), represented by the MSCI USA Small Cap and MSCI World ex USA Small Cap Indexes, earned a much higher proportion of revenues domestically than the large caps in their parent indexes. This observation makes intuitive sense given the challenges a small company faces in expanding internationally. Thus, smaller, domestically oriented companies in DM could be shielded from the potential risks associated with international-trade disruption due to deglobalization.

EM small caps are not one-size-fits-all

Because China has a 30% market-cap share in emerging markets (EM), represented by the MSCI Emerging Markets Index, we separated China from the rest of EM in our analysis.

We found that small caps in China, proxied by the MSCI China Small Cap Index, had slightly higher international revenues than large caps in the MSCI China Index. A likely explanation is that Chinese firms have established themselves as major suppliers to the developed world.

As deglobalization has accelerated, multinational corporations have begun to relocate logistics to geographically closer nations (nearshoring), nations with which they have geopolitical ties (friendshoring) or their nation of origin (reshoring). As a result, certain Chinese firms, some of which may be small caps, could be vulnerable to this “shoring” trend.

In EM ex China, as in DM, small firms had lower international revenues than larger firms. In these markets, an approach that combines economic-exposure data with industry considerations and fundamental analysis could identify smaller firms in EM ex China that might be potential beneficiaries of supply-chain rewiring.