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Title: It Turns Out, The Fastest Growing Emerging Market Is Right Here In The US
Source:
Business Insider
URL Source: http://www.businessinsider.com/this ... ce-as-fast-as-any-bric-2011-12
Published: Dec 12, 2011
Author: Sam Ro
Post Date: 2011-12-12 10:48:44 by A K A Stone
Keywords: None
Views: 553
Richard Bernstein recently published his five favorite investment themes. One of those themes: "Overweight of smaller US stocks, with an eye for smaller, domestically-oriented financials." One characteristic that makes this sector attractive is its extraordinary earnings growth potential. From Bernstein's 2012 outlook: We continue to believe that the best secular investment theme in the global equity markets is US small cap stocks. Smaller US companies are starved for capital much the way that emerging markets, energy, and commodities were ten years ago. By definition, capital starved companies’ higher cost of capital translates to higher expected returns for investors. Investors appear to be overlooking smaller US companies’ fundamentals. As shown previously in Chart 4, companies in the Russell 2000 have been producing positive earnings surprises at a better rate than most other regions of the world. Although smaller US companies’ earnings fundamentals are not yet superior to their larger US counterparts, we believe that relationship is likely to reverse. Some investors are concerned about the valuations of smaller capitalization stocks, but we think those views ignore smaller companies’ earnings potential. Chart 7 shows that US small caps remain one of the fastest growing segments of the global equity markets. In fact, the 2012 projected earnings growth rate for the Russell 2000 is presently three times that of China’s and nearly four times that of emerging markets in general. The caveat to investing in smaller companies is their stocks’ typical volatility. Smaller companies are extremely sensitive to changes in the macro-economy. In the “risk on/risk off” world, smaller companies tend to significantly outperform when risk is “on”, and significantly underperform when risk is “off”. However, despite the volatility during 2011, the Russell 2000 has nonetheless outperformed the MSCI Emerging Market Index by about 10% so far during 2011. 
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