The long-term returns of small cap stocks are actually considerable. Historically, the long-term return of small cap stocks in A-Shares from 2010 to 2021 is actually very considerable: the average annual rate of return and annualized rate of return of the wide base index of small cap stocks represented by China Securities 1000 and China Securities 2000 are higher than that of Shanghai and Shenzhen 300 and China Securities 500, especially China Securities 2000. The same is true overseas: small cap stocks have better long-term returns than large cap stocks. If we take Russell 2000 as the representative of small cap stocks in the United States and S & P 500 as the representative of large cap stocks in the United States, we will find that during the 22-year period from 2000 to 2021, the average annual return (8.69%) and annualized return (7.02%) of Russell 2000 index are higher than those of S & P 500 index. This paper will explore the core driving force behind the long-term rich returns of small cap stocks.
Compared with China Securities 1000, China Securities 2000 can better represent small cap stocks. It is also a representative index of small cap stocks. The historical long-term performance of Guozheng 2000 is obviously better than that of CSI 1000. We believe that the above-mentioned differences in returns actually reflect: (1) differences in market value distribution: compared with CSI 1000, the constituent stocks of Guozheng 2000 are smaller in terms of both the median total market value (5.15 billion yuan) and the average value (6.73 billion yuan), which are closer to the average value of the whole market. We believe that this may be due to the reform of the registration system, which has brought more and more smaller enterprises to the market. (2) Industry distribution difference: the main constituent stocks of Guozheng 2000 and CSI 1000 are basically concentrated in the manufacturing industry. The difference is that Guozheng 2000 has a greater weight in automobile, basic chemical industry and mechanical equipment, but no single industry has a weight of more than 10%, and the industry distribution is more scattered than CSI 1000. (3) Who can better represent Industrial Transformation: compared with CSI 1000, the constituent stocks of Guozheng 2000 include more enterprises explicitly encouraged by industrial policies (such as "specialization and innovation"). (4) In Guozheng 2000, there are also a large number of traditional industry enterprises that have been ignored in the past but become more and more important in the inflationary environment.
The resumption of small cap stock market in history: driven by inflation and industrial transformation. Through the market of small cap stocks in the history of resumption of trading, we will find that inflation and industrial structure transformation are often important catalysts for the market of small cap stocks. At this stage, large enterprises are not as flexible as small enterprises in strategy / business adjustment, and their decision-making is easily affected by the existing market position. In history, the main time intervals for the state securities 2000 to outperform the CSI 300 are: January November 2010, February 2013 to October 2014, January 2015 to November 2016 and February 18, 2021 to now. In the same period, China Securities 2000 also outperformed China Securities 1000. The macro environment above is usually the economic downturn and inflation recovery, and also accompanied by the corresponding industrial cycle: whether consumer electronics in 2010 or Internet plus in 2013, and the semiconductor and new energy industry cycle since 2019 are all important support for small cap stocks' blossom everywhere. Therefore, the valuation contribution behind the dominance of small cap stocks is not large, but the advantage of profits over large cap stocks is the core driving factor. Therefore, when economic growth is constrained by inflation, the market may seek new growth points (innovation and technological progress), that is, opportunities under the transformation of industrial structure. The above scene happened during the "stagflation" period in the 1970s in the United States: we found that there was obvious differentiation within technology stocks after 1975: small cap stocks outperformed large cap stocks by a large margin, and Intel outperformed IBM by a large margin. The core driving force lies in: under the stagflation environment, high energy costs force the transformation of industrial structure; The vigorous implementation of American antitrust law provides a "free ride" opportunity for the technological progress of small and medium-sized enterprises.
Nuggets small cap stocks under cost impact: grasp the revaluation of digital economy, new energy technology and traditional economy. At present, driven by green inflation, inflation elasticity will be greater than demand elasticity. Under the impact of cost, focusing on the efficiency improvement and technological breakthrough of new energy systems and the digital economy to get rid of energy dependence will bring different growth opportunities for small companies. Compared with large enterprises that have formed moat and mode advantages in the past environment, small cap stocks represented by Guozheng 2000 can better adapt to environmental changes and have more transformation advantages; Some of the small cap value stocks were underestimated by the market under the low inflation environment in the past. At present, the profit expectation of Guozheng 2000 is still improving significantly, but the valuation and equity risk premium are in the range of high allocation value, and there is not much attention. In the future, small cap stocks will be a blue ocean in the "stagflation" environment.
Risk tip: the performance of small cap stocks is lower than expected; Inflation fell short of expectations.