Geoff Cutmore - Morning Thoughts

Small-Cap Japan Vs. Megacap U.S.: Which to Buy?

Geoff Cutmore

Two ends of the market-cap spectrum that came out as current favorites in our conversation with Bob Parker. The Credit Suisse Asset Management vice chairman suggested buying both was a sensible strategy. So don't choose one over the other, take both, was the message.

Megacap has become the strategists' friend. While they have yet to fully participate in the current rally there is room for upside re-rating. The management has, in many cases, finally been forced to focus on the businesses and balance sheet, and private equity is threatening ever-larger deals. There is also a useful security aspect to the larger cap companies; they have a defensive quality when markets correct. They fall less far and retain sufficient liquidity for exit trades.

Small-cap Japan is the place to position for domestic-led strength. The weak yen, argued Parker, is one of a number of positives for the country's smaller companies. While foreigners tend to think of the major brands that represent Japan impressively on the world markets, the economy is much more like Germany's in nature. It is dependent on the collective efforts of businesses with less than a few hundred employees.

I suspect, even as the small-cap stocks have started to outperform the 225, the really big moves will come with an interest-rate hike. Last year the 225 was top dog, but failed to offer convincing evidence for outperformance this year. Small caps have only picked up the pace in the last five to six weeks. Watch the BOJ for indications of a move in September. That might just convince investors Japan's deflationary interlude is coming to a close.