HONG KONG: Mid-cap and small-cap growth businesses have become a "sexy" investment in the current environment.
Franklin Equity Group chief investment officer Jonathan Curtis said mid-cap and small-cap growth businesses are generally undervalued at the moment compared to their large-cap counterparts.
He said the price-to-earnings multiple on the market cap weighted S&P500 has not been this elevated versus the S&P500 equal weighted index for at least the past 13 years.
Mid-cap and small-cap businesses also tend to be more sensitive to the economic cycle and may benefit from still resilient consumer spending and business activity.
"That said, investors should be wary of signs that less affluent consumers are starting to bear the pressures of higher interest rates.
"Mid-cap and small-cap businesses offer more potential for innovation and disruption than large-cap businesses, as they are often nimbler and more adaptable to changing customer preferences, innovative technologies, and competitive pressures.
"They may also have more opportunities to expand into new markets, acquire other businesses or become acquisition targets themselves," Curtis told Business Times here.
According to Curtis, developed markets and the US economy in particular, are showing signs of relative resilience and growth, thus making them attractive in this period of increasing macro and geopolitical uncertainty.
He also sees supportive valuations down the market cap spectrum in companies with exposure to the key themes including digital transformation, healthcare innovation, and energy transformation.
"This valuation disconnect creates an opportunity for investors to diversify their portfolios beyond the handful of large-cap growth businesses that have dominated the market for the past decade," he said.
On the outlook of the global and emerging market equities, Templeton Global Investments chief investment officer Manraj Sekhon said the current environment for global equity investors is unique.
This is because it offers a balance of near-term uncertainties and attractive long-term growth drivers.
"The short-term risks to the global economy include slower growth due to high interest rates and elevated geopolitical challenges. This contrasts with the longer-term potential from breakthroughs in technology and healthcare alongside other secular trends.
"This environment provides fertile opportunities for long-term bottom-up investors, including Franklin Templeton," he added.