A quick look at the US small cap premium

Published on March, 9th 2021 Market and research

Frank Trividic

Deputy CIO

Written on 8th March 2021 by Seeyond

Let’s look at the facts:

  • We use treasury yields, economic activity, commodity prices and investors sentiment to model the main drivers of US Small cap excess return (compared to US Large Cap)
  • Covid-19 created a specific risk premia leaving US Small cap largely undervalued until the end of last year.
  • The announcement of vaccines put an end to the premium and small caps model are priced (slightly) above fair value.

What do we think?

  • This spread will remain highly sensitive to the steepening of the yield curve and to risk aversion. With continued economic recovery, we believe small caps will appreciate further, fuelled by higher long term sovereign yield and a progressive decrease in equity volatility.

Small Cap chart

Market is defined by the ratio of Small Cap Prices divided by large Cap prices.

Model is a proprietary Seeyond Small Cap pricing model.

Source: Bloomberg, Seeyond, February 2020

This article has been provided for information purposes only to professional clients as defined in the MiFID Directive. It must not be used for retail investors. The provision of this material or reference to specific sectors or markets in his article does not constitute investment advice or a recommendation or an offer to buy or sell any security. Investors should consider the investment objectives, risks, and expenses of any investment carefully before investing. Views expressed in this article as of the date indicated are subject to change and there can be no assurance that developments will transpire as may be forecasted in this article.