Large vs Small Caps: Fundamentals vs Risk

One of the asset allocation decisions we research is whether to favor large-caps or small-caps within an equity portfolio. Currently, we see a stark divergence in the broad categories of indicators: the fundamentals of earnings estimates and valuations are now more favorable for small-caps, while low risk appetite among investors and later cycle economic conditions have been favoring large-caps.

Emerging Markets fundamental momentum still very weak

In our regional allocation work, we have been underweight in Emerging Markets relative to developed markets since May, and remain so currently. A key reason for our continued underweight stance is that the relative fundamental momentum for emerging markets remains very weak compared to that of the broader global equity market.

The chart below shows one of our popular composite indicator charts based on the relative performance of the widely-followed MSCI Emerging Markets ETF, ticker EEM, versus the broad global benchmark of the MSCI All-Country World Index (ACWI) ETF, represented by ticker ACWI.

Tech fundamentals still favor Hardware over Software

While the Technology sector has been less dominant in terms of returns this year than it was last year, it remains the largest sector in the US market by value and the focus of much investor attention.

Our view within the Technology sector for some time now has been to favor hardware-related industries over software-related or services areas, and the latest update of both bottom-up and top-down indicators continues to support this view.