Many smaller AI sector stocks in the Asian market are relatively few, so their valuations are not expensive; coupled with the dovish turn of the Federal Reserve, which has pushed up the currencies of these Asian countries, some central banks have room to lower interest rates and implement loose policies to support economic growth.
The previously unpopular small-cap stocks have been in the limelight this month, driven by multiple factors such as low valuation, loose monetary policy, local bullish factors, and the desire for risk diversification among investors.
Global small-cap stocks have surged recently, with one of the main reasons for this surge being the expectation of a significant 50-basis-point rate cut by the Federal Reserve next week, as small businesses rely more on borrowing and floating rate loans.
The surge of small-cap stocks is particularly evident in Asia, with Thailand, Singapore, and New Zealand emerging as the best-performing markets globally this month. The benchmark indices in these markets have all risen by at least 3% this year, while the MSCI Global Equity Index fell by about 1% after four consecutive months of growth. Foreign investors are expected to increase their holdings of Southeast Asian stocks for the fifth consecutive week.
Even after the recent surge, these Asian markets still possess favorable valuations. The benchmark indices in Thailand, Singapore, and the Philippines currently have a PE ratio of less than 15 times, all lower than their three-year averages. In contrast, the PE ratio of the MSCI Global Index exceeds 17 times, and the PE ratios of the S&P 500 Index and India's NSE Nifty 50 Index exceed 20 times.
Some small-cap stock markets outside of Asia have also performed exceptionally well this month, with Argentina, Lebanon, and Zambia's stock markets ranking among the best-performing markets globally this month.
Small-cap stocks are benefiting from multiple tailwinds.
As large-cap stock markets enter a period of adjustment, multiple bullish factors are emerging in small-cap stock markets, causing investors' focus to shift.
Many smaller Asian markets have fewer stocks in the AI sector, so the valuation is not expensive. In addition, the dovish shift of the Federal Reserve has pushed up the currencies of these Asian countries, giving some central banks room to lower interest rates and implement loose policies to support economic growth.
New Zealand unexpectedly lowered interest rates last month, pushing up the country's benchmark stock index; the Philippines also made its first interest rate cut in nearly four years and hinted at further easing in the future; Indonesia and Thailand are expected to cut interest rates in the fourth quarter. James Cheo, Chief Investment Officer for Southeast Asia and India at HSBC, said,
"US interest rates are stabilizing or falling, which provides room for smaller economies to adjust their own policies - they no longer need to worry about the phenomenon of massive capital outflows when the Federal Reserve tightens monetary policy."
At the same time, these smaller economies also enjoy local bullish factors, such as political stability in Thailand and real estate investment trusts (REITs) in Singapore benefiting from the global interest rate decline.
On the other hand, large stock markets are facing an adjustment period.
Volatility in the US stock market is increasing - traders are discussing the pace of Federal Reserve easing, the outcome of the US election, and whether the AI boom is coming to an end.
The Bank of Japan is preparing to raise interest rates again, and the strengthening yen has caused the Japanese stock market's record-breaking upward momentum to stall.
The Indian stock market is facing valuation concerns, having previously achieved the highest global gains.
Both the South Korean and **** stock markets, dominated by technology stocks, experienced outflows of foreign funds this month, as the prospects for AI-related stocks are uncertain.
Therefore, Manish Bhargava, CEO of Singapore Straits Investment Management, stated:
"Some investors are seeking to diversify their investments from volatile large stock markets, resulting in inflows of funds into smaller markets. Investors may hope to reduce the risks associated with large economies and profit from the growth potential of smaller markets."
However, these small markets have limited scale and face certain limitations in attracting long-term investors such as retirement funds. In addition, if market risk appetite recovers and the global AI boom reignites, the outstanding performance of these small markets may be short-lived.
Editor/Lambor