Small Cap Outperformance

Over the past year, small capitalization indexes have outperformed their large capitalization counterparts. Although the reasons for this rally are varied, attractive return on assets of emerging market (EM) small-cap constituents and specific domestic drivers have supported this trend. We look at Brazil, Japan, and India as particular observations of this trend that should be monitored going forward.


Many small-cap indexes have outperformed their large-cap peers across the globe over the past year. Although the exact reasons for this trend may vary, this global theme has been amplified in select countries. Within emerging markets (EM), particularly companies in the MSCI Brazil and India indexes, small-caps have benefited from structural reforms and improving local economies. Additionally, a historical breakdown of EM companies globally shows why this outperformance may have occurred: small cap EM companies are generally more efficient than their developed market (DM) peers, as measured by their return on assets.

Relative performance of small cap over large cap for Japan, India, and Brazil

Relative performance of small cap over large cap for Japan, India, and Brazil

Source: Thomson Reuters, BlackRock, as of August 8th, 2017. Notes: The indexes include the MSCI Japan Index, MSCI Japan Small Cap Index, MSCI Brazil Index, MSCI Brazil Small Cap Index, MSCI India Index, MSCI India Small Cap Index. Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.


EM small caps are generally more efficient than DM small cap peers

EM small caps are generally more efficient than DM small cap peers

Source: Bloomberg, EPFR Global, UBS Estimates. Note: Company data for DM and EM is represented by the MSCI World Index and MSCI Emerging Markets Index, respectively. The company percentile is based on the companies' average market capitalization between 2013 to 2015. The DuPont analysis measures operational efficiency and financial leverage. The definitions are: net margin = (net income / revenue), asset turnover = (revenue / assets), return on assets = (net income / assets), leverage = (assets / equity), return on equity = (net income / equity).