Turnaround for small caps in 2024?

2023 turned out to be a good year for large caps in general, in the US led by the megacap stocks, whereas small caps lagged substantially. SP500 was up 24 %, led by the magnificent seven, Nvidia, Microsoft etc, whereas the equal weighted S&P 500 index returned 11 % during last year. In Europe and the Nordics large caps returned 14-15 % last year. This was the second year with weak relative performance for small caps. The smaller the company, the worse performance as markets sold off small companies in a risk off mode sentiment.

The gap between the small and large cap performance during the last two years is enormous as large caps in the Nordics and Europe had flattish performance with returns between 4-5 %, whereas Nordic small caps were down 20 %, and micro caps more than 30 %. The correspondent figures in Europe are -14 % and -26 %. Valuation wise the small cap discount has risen to more than twenty-year highs at 25-30 % in the Nordics. In a more constructive economic environment small caps usually trade at premium to large caps. Nordic small caps experienced outflows until November of last year when investors’ risk appetite increased again as inflation and interest rates declined.

The performance and valuation gap stretched too far, and a turnaround started as Fondita Nordic Small Cap rebounded 30 % in the matter of two months from late October until year end. During the same period large caps returned 15 % and the small cap market 25 %. It was a comeback well correlated with lower interest rates.

From a business cycle point of view, it also seems that worst starts to be behind us. Although there still is some inventory reduction going on, many companies seem to weather better times in the latter part of the year. If interest rates keep in check and geopolitics do not offer any major surprises the prerequisites for a continued come back for small caps are in place for 2024.

Markus Larsson
Fund Manager