As the APAC economy continues to grow, accounting for approximately 39% of global GDP, there are emerging opportunities in both the small-cap and large-cap sectors. Finding the right balance for your portfolio, creating diversity while focusing on long-term capital growth, can be challenging. This article will look at the varying opportunities for investors looking to optimise their portfolios.

 

Understanding the dynamics of the APAC region

 

The definitions of small-cap companies (ranging from $300 million up to $2 billion) and large-cap companies (in excess of $10 billion) have changed dramatically over the years. While these definitions will vary between different APAC countries, this gives an idea of the range of market capitalisation. It is fair to say that the APAC region offers more opportunities than most, but it is important to be selective and carry out in-depth research.

 

As we have seen in recent times, when markets are volatile and investors become risk averse, equities tend to suffer, but smaller capitalised companies suffer more than most. Therefore, when looking at this type of investment, it's important to take a long-term approach—especially with the more volatile technology sector!

 

Strategic benefits of small-cap exposure

 

Whether looking at smaller companies in the APAC region, Europe, the Americas or any other region, there is potential for significant long-term growth, but there can be variations. For example, developing economies like Vietnam and the Philippines have historically outperformed their large-cap counterparts. Even looking towards more established markets such as Japan, Japanese small caps have outperformed their larger counterparts over the last decade, delivering, on average, double-digit growth. This is one reason why having expertise on the ground is still essential, especially in specialist areas such as small caps.

 

Another aspect to consider is market inefficiencies, which can be particularly prevalent in the small-cap sector, which is often under-researched. Identifying and acting on these pricing discrepancies is not easy, and you may not always be able to deal in significant size, but it can enhance portfolio returns. There are many examples of outperformance, from technology companies in South Korea to biotech companies in Taiwan, but finding these gems can take time.

 

The defensive strength of large-cap investments

 

Looking at APAC markets such as Japan, Australia, and South Korea, large-cap traditional companies such as Samsung, Toyota, and BHP have huge market capitalisations and dominate their markets. While there may be limited growth compared to their small-cap counterparts, these companies offer a degree of stability and resilience.

 

In theory, the returns from larger companies are more predictable, less susceptible to volatility, and can become something of a safe haven in challenging times. While returns may not be as strong as those of small caps in a bull market, they do offer an important degree of balance and lower standard deviations in returns.

 

For many investors, income generation is an important consideration and more likely to be achieved through investment in larger companies. Larger companies can create significant long-term income streams due to a mix of business maturity, predictable growth, and strong cash flow. Conversely, smaller capped companies tend to be investment-heavy in the early days with limited scope for dividends.

 

Summary

 

The APAC region offers a relatively unique mix of small and larger capped companies with a powerful presence in technology. Investment in the small cap sector tends to be investor sentiment-driven and dictated by investor appetite for risk. History shows that the APAC region has developed some of the largest companies in the world, with a particular focus on technology. In many ways it offers a unique mix of long-term capital appreciation together with relatively stable returns and income streams from the larger companies with strong cash flow.

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