Since the current uncertainty in Ukraine may continue for some time, investors may want to seek opportunities that are not only partially shielded from that uncertainty, but also positioned to capture potential upside should a resolution cause a global, risk-on rally. Interest rates are likely to remain low relative to history even as the Fed begins to raise rates from the bottom, so for investors seeking higher returns, we believe listed equities remain attractive.
The strength of the US economy persists, and we believe domestically focused companies could be insulated from the war in Ukraine. Not only are US small caps more domestically focused, but they also currently offer cheaper valuations. Schroders’ investment process seeks to reduce risk by investing in different types of small-cap companies that have the potential to outperform across a variety of market environments.
Small Caps Have Outperformed Since Russia Invaded Ukraine
Europe significantly underperformed as the invasion began, followed by emerging markets and Japan. US stocks held up, however, with US small caps (as represented by the Russell 2000 Index) outperforming the more globally exposed S&P 500 Index and NASDAQ Composite Index (Figure 1).