Will rate cuts make Asian small caps more attractive? Bernstein weighs By Investing.com

Investing.com– The prospect of lower interest rates in the coming months presents a favorable environment for Asian small-cap stocks, Bernstein wrote in a note, although some risks to that trend still remain in play.

Bernstein said Japan and some economies in the ASEAN region showed positive growth trends, reflecting a “good setup” to gain small- and mid-cap exposure.

Large-cap stocks have largely dominated the market gains seen over the past year in the US and Asia, Bernstein noted. But the brokerage noted that even amid rising expectations of lower interest rates, there were no signs of a wider turnover in small-cap stocks in recent months.

Bernstein argued that there has been no such broader shift towards small caps in Asia and that regional markets have displayed idiosyncratic performance in relation to this trend.

Japan is an outlier, where the Bank of Japan is expected to start raising interest rates this year amid improving local economic conditions. This is expected to benefit small- and mid-cap stocks with high exposure to domestic demand, Bernstein said.

India is the only Asian market where small-caps have seen relatively healthy positioning, with short-term gains remaining supportive of the trend, Bernstein said.

But the brokerage recommended more selectivity for small- and mid-caps in India and increased exposure to large-caps, citing a wide gap in valuations and overcrowding in investor positioning.

With the exception of Australia, South Korea and parts of the ASEAN region, small caps have generally outperformed larger ones over a long period of time, Bernstein said.

From an earnings perspective, Bernstein said he still saw earnings support for large-caps over small-caps for most of the region, except for China and ASEAN.

But globally, the brokerage still expects the large-cap lead to continue until there are more signs of macroeconomic and earnings support for smaller stocks.