Best Regions for Small-Cap Growth
11/09/2012 10:00 am EST
Small-cap manager Jim Oberweis discusses the three main global small-cap regions, and explains which ones are his favorites now.
What’s happening in global small caps? We’re here with Jim Oberweis, who is going to tell us what’s really going on beyond US shores.
Sure. I think you can divide the world into three components—it’s called North America, Europe, and Asia. I think they’re all in very different stages.
Europe, I think, continues to be bogged down by economic macro problems and really political problems of aligned leaders all in one space. Things are getting a little better than they were. I think there is still a lot of dust that needs to be settled.
Asia? Asia is slowing mostly because of Europe. About 25% of China’s economy stems from exports to Europe. However, it’s fully discounted stock prices right now. Valuations in China for small-cap Chinese companies are lower than they were in 2008. It’s the only market in the world where we’re seeing that right now.
We’re very enthusiastic about China, just because stocks are so cheap and that the policies that slowed the Chinese economy besides slower exports like rising interest rates and tighter credit are now being reversed. Interest rates are being decreased and credit is being loosened. That should kick in in 2013. I think it will drive valuations for Chinese equities substantially higher.
In the Asia space, is there any interest on your part in Japan, where they’re starting to rebuild after the tsunami and the nuclear incident?
Japanese small caps have been driving our Overweight Opportunities Fund this year. It’s actually been a really good place to be. It’s been a good place for a couple of reasons.
- Because some of the factors with regard to the economy doing OK despite really lackluster expectations;
- Because valuations were so low.
If you’re going to ask me where I would park money for the next decade, it would be in China. China has market opportunities that are really unprecedented in areas like smartphone development, where only a small percentage of the population right now has smartphones.
It’s a major issue with the government, and disposable income is rising. The companies that’s strong in that space are actually pretty well positioned.|pagebreak|
Generally speaking, when you would say smartphones, Americans would think well, I mean obviously you’ll have Apple (AAPL) moving into that space and you’ll have Motorola and you’ll have these companies. What you’re saying is that basically you’re going to be looking at Chinese companies—local companies taking over the local market or at least moving into that local market and the global market, right?
I would look at all three. I would look at companies that make components that go into smartphones. I would look at smartphones for companies like Apple. So even like US companies like InvenSense (INVN) or Sirius (SIRI), those are well positioned.
There is going to be a market in Asia that will buy those phones, but I would also look downstream. Companies like Spreadtrum (SPRD) that makes local Chinese lower-cost phones, $100-type phonies.
Then there are companies that provide auxiliary services, companies like NetQin (NQ) that make software that reside on top of cell phones to prevent spam and malware from entering the phones. There are a lot of opportunities surrounding the overall macro play.
Given just the population density and the rising export linking with China, the companies surrounding that central theme are likely to do pretty well even if GDP overall in China slows due to slow exports.
Because you’re still going to have that domestic demand that’s going to drive it.
You got it.
Exogenous forces like outside demand doesn’t really matter.
There are also, I would assume, companies to watch inside other spaces in Indonesia, Malaysia, and Vietnam. Instead of going with home companies that are more directly involved in those markets, you think the Chinese companies are probably the better play?
Yeah. I was in Indonesia earlier this year for exactly that purpose. We went down and visited a lot of companies. I have to say honestly, overall I’m more excited about China, mostly because of valuations again really pounced on. Indonesia started to look interesting when China’s valuations peaked, because it was difficult to find and you can get the same confidence in returns.
Chinese valuations have bottomed now. They’re about as low as I’ve ever seen in the last decade right now. Not because of the market—we’re up 15% this year in China—but because the earnings have appreciated faster than stock prices, driving valuations lower even to mid decent appreciation this year.
So I think Indonesia, Malaysia and Vietnam are really tied to the engine of China’s growth. I think I’d rather just play it pure.
Vietnam, interesting country, great development. The way to play Vietnam is through private equity, not through public equity. Public equity markets are just too corrupt.